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REFILE-Jefferies snaps up barren U.S. loan market with $1.275 billion in venture debt

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(Rephrased for a wider audience.)

NEW YORK, April 16 (LPC) – Investment firm Jefferies shored up an otherwise barren U.S. leveraged loan market in April, bringing in $1.275 billion worth of new supply on attractive terms to appeal to a yield-hungry investor base still weighing the fallout from the coronavirus.

Volatility from the virus has rattled markets, forcing companies to halt operations and shore up cash. Falling productivity pushes the economy into recession.

U.S. leveraged loans haven’t had a broadly syndicated deal in almost a month. Since April 6, however, Jefferies has stunned the market with three deals that offered investors double-digit yields for loans to companies desperate for cash due to the global pandemic.

“When Jefferies has a lot of stuff in the market and nothing else is happening, we know there’s an opportunity,” said a bank managing director. “They work with companies in a lot of industries that have been impacted by the virus, like restaurants or retail, so Jefferies can step in and seal deals with great coupons.”

The investment firm’s spate of activity is a timely reminder of the ability of so-called “non-bank lenders” to back highly leveraged companies during an economic downturn when more regulated institutions shy away from risk.

In 2013, regulators issued guidelines forcing some of the largest investment banks to cut lending to some of the riskiest deals, and Jefferies was not bound by the same rules, allowing it to step in and offer more debt than rivals.

Cosmetics company Revlon on Tuesday launched an $850 million first-lien loan led by Jefferies at 1,050 basis points above Libor and added a 2% in-kind payment feature, according to three people familiar with the matter.

Jefferies also finalized a $125 million incremental loan for Everi Payments on Tuesday. Investors oversubscribed the deal, which allowed the gaming industry equipment provider to tighten margins on offers by 200 basis points to 1,050 basis points over Libor, three sources said.

Both deals came a week after Jefferies priced the bullion deal. The financing is the third deal the investment firm has led in seven months for a casino operator owned by Texas businessman Tilman Fertitta. Refinitiv LPC reported on April 8 that demand was enough for the company to increase its loan by $50 million to $300 million.

“Jeffries is really busy. Some accounts are only getting allocations of $50,000 in (nugget) loans. There’s a lot of money chasing stressed or distressed names right now,” said one investor.

Jefferies’ well-timed venture wasn’t without consequences.

On Wednesday, S&P Global Ratings downgraded Jefferies’ outlook to negative and maintained its BBB rating. The ratings firm said in a note that market pressures from the coronavirus will reduce the investment firm’s profitability in the coming months, due in part to lower earnings at its investment banking unit, Jefferies Group LLC.

Jefferies Finance LLC, a joint venture between the investment firm and MassMutual that handles syndicated corporate loans, had underwritten commitments of more than $2 billion at the end of February and now faces the daunting task of syndicating that debt amid the most difficult market conditions, the rating agency said.

Spokespeople for Jefferies, Everi and the Golden Nugget did not respond to requests for comment.

high stakes game

Investors were pleased to absorb new, smaller loans for the Golden Nugget and Everi, causing both companies to tighten offer terms, but Revlon’s massive deal comes as the company grapples with declining earnings and cash flow, according to an April 3 report from Moody’s Investors Service.

The new $850 million term loan was launched by subsidiary Revlon Consumer Products Corp as part of the company’s recapitalization to enhance liquidity and improve the maturity profile of borrowers.

According to Revlon’s lender presentation on Tuesday, the first-lien term loan comes with a $950 million second-lien loan and an unspecified third-lien loan.

The new bond issue will repay a $200 million loan it signed with Ares Management last August, refinance part of a $1.8 billion seven-year loan Revlon raised in 2016, and fund general corporate purposes, according to three sources previously cited.

Moody’s downgraded the subsidiary’s rating to Caa3 from Caa1 and its senior secured loan to Caa2 from B3, according to an April 3 report.

Revlon, which has a debt-to-EBITDA ratio of about 11.0 times, must also repay a $500 million bond due in February 2021 and an $82 million loan due next July, Moody’s added.

To lure lenders on board, Revlon not only provided a generous 1,050 basis point margin, but also attached a 1.5% Libor floor and set the loan maturity date to June 2025, according to three sources. Typically, first lien loans have a term of seven years.

Lenders can also rest assured that the new financing will be secured by company assets, including foreign subsidiaries that hold certain intellectual property rights for well-known brands such as Elizabeth Arden and American Crew, according to the lenders.

A Revlon spokesman was not immediately available for comment.

Companies related to the travel, leisure and retail sectors, which have been hit particularly hard by the coronavirus as consumers stay indoors, also saw their debt fall sharply.

Revlon’s existing term loan, due in 2023, is hard to recover this month along with other deals in the secondary market. The average offer price for the loan was 37-42 cents on Tuesday, up from an average of 31-35 cents on March 23, when the U.S. leveraged-loan market bottomed out, according to two sources.

“These are the sectors most exposed to the virus, so their loans have fallen more sharply,” said George Goudelias, managing director at asset manager Seix Investment Advisors. “These firms are not only exposed to volatility, but if you first raise debt in a market that’s not active, it’s going to be an expensive move.” (Reporting by Aaron Weinman. Editing by Michelle Serra and Kristen House.)

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