There are impressive financings, and then there are mind-blowing financings.
And they way that KKR is raising $24 billion to fund its acquisition of First
Data definitely falls into the latter camp.
Item: KKR will use First Data to issue $8
billion of junk bonds to help pay back the purchase price. That will be
the largest junk-bond issue of all time.
And that’s just the beginning: the largest junk-bond issue of all time is a
mere one third of the total amount of debt financing that KKR is lining
up. The other $16 billion is coming from the
loan market – and all of it is "cov-lite".
When is a loan not a loan? When it’s "cov-lite" – which is
to say that it lacks the covenants (investor protections) that conventionally
distinguish loans from bonds. A cov-lite loan is the worst of both worlds, from
an investor point of view: it doesn’t have the liquidity of a bond, and it doesn’t
have the protections accorded by a loan.
But a $16 billion loan is always going to be pretty liquid, and it will be
distributed to so many banks and hedge funds that maybe the cov-lite option
makes sense. After all, trying to get them all in a room to agree to any modification
of the loan agreement would pose an enormous collective-action problem in and
of itself.
In any case, it’s interesting to me that KKR is finding it easier to raise
money in the loan market than in the bond market. Why? There’s a clue in a comment
from jck on a post of mine earlier today:
The frothy market is for CDS, bond prices have been tanking pretty steadily
for about 3 months.
In English, issuing bonds is expensive, and the yields that companies such
as First Data have to pay to get their bonds out are quite high by the standards
of a few months ago. Meanwhile, buying protection against a loan default has
never been cheaper. So the banks can happily lend $16 billion to First Data,
and then hedge their credit risk in the CDS market.
Who’s selling all that protection? Is it still CDOs? That I don’t know. But
I do get the feeling that if the First Data loan ever does default, the managers
will end up dealing with a very large number of non-bank players from the world
of credit derivatives: not your father’s creditors’ committee, by any means.