BMC Software bonds hold in as Envision Healthcare offering in focus

By Paul A. Harris

Portland, Ore., Aug. 22 – Aggressive buyout financings driven by private equity firm KKR commandeered the new issue spotlight in the waning days of summer and promise to do so when the market reconvenes after Labor Day, market sources say.

The deals in question, KKR's $8.3 billion buyout of BMC Software and its buyout of Envision Healthcare Corp., valued at around $10 billion, are highly leveraged, both coming in at around 7.5-times debt to free cash, sources say.

And the debt financing regimes of both buyouts were aggressively bid by the banks, they add.

Both of these KKR deals were struck in the late spring and early summer of this year when the market was doing very well, a debt capital markets banker recounted.

Subsequently you had a lot of trade war talk and a drop in oil prices, and things widened a bit, the source added.

One metric that points to the aggressiveness of the BMC $1,825,000,000 equivalent junk bond deal is the narrow spread between the bridge cap on the dollar-denominated bonds, 10%, and initial price talk of 9¾%, sources said.

Initially market sources were expecting the BMC bond deal, via left bookrunner Goldman Sachs & Co., to launch right after the mid-week July 4 holiday.

However, the roadshow ultimately didn't begin until early August.

The bonds – senior notes due September 2026 – eventually priced on Aug. 9, with $1,475,000,000 of 9¾% notes and €301.5 million of 8 3/8% notes both pricing at par.

Helping the deal cross the finish line were a raft of covenant changes and improving market conditions, sources say.

Although there was a period when the dollar-denominated paper sagged slightly below new issue price, lately the BMC 9¾% senior notes due 2026 have brightened.

They were par bid, par ½ offered on Wednesday morning, according to an investor.

Envision Healthcare eyed

On, then, to the second of KKR's high profile, high leverage late summer-early fall deals to play out in the junk market: the expected $2.15 billion of high-yield bonds helping to finance the Envision Healthcare LBO.

The bond deal, likely to be led by Citigroup Global Markets Inc., is expected to come early in the post-Labor Day period amid a sizable and growing pipeline of potential issuance, including merger and acquisition financings and opportunistic deals, which could drive September issuance to $20 billion to $25 billion, sources say.

Like BMC Software, there is a bridge loan backing the Envision Healthcare bonds.

The BMC bridge was at least partially syndicated.

The Envision bridge has not yet been syndicated, according to the debt capital markets banker, who added that while syndication of the Envision bridge remains a possibility, at this point dealers may elect to go straight to market with the bonds.

As BMC Software bridge participants cast an eye on the narrow margin separating the 9¾% initial price talk on the dollar notes, and their 10% bridge cap – with trade war rumblings and sagging oil prices roiling the market – there was some cause for apprehension, should pricing widen beyond the bridge caps leaving the bridge participants responsible for the difference.

As it turned out, with concessions on the covenants and improving market conditions the BMC Software deal ended up being multiple times oversubscribed, sources say.

Conceivably the bridge participants were rewarded with better allocations of the oversubscribed deal, although market players are quick to point out that there is no quid pro quo that improves allocations in return for bridge participation.

Whether a rocky ride for the BMC bridge participants impacted the appetite for Envision Healthcare bridge debt is not easy to say, the debt capital markets banker remarked.

However, people were certainly watching the BMC deal as an indicator of how things might go when Envision Healthcare makes its autumn pass at the high-yield primary.

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