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Zayo’s US$6bn LBO to test market appetite for single-B loans

By Aaron Weinman

NEW YORK, Oct 30 (LPC) - Approximately US$6bn in acquisition financing for fiber optic cable company Zayo Group could hit the leveraged finance market before the end of this year, a move that will test an investor base that has grown hesitant over single-B credits exposed to a cooling US economy.

Zayo, which will use the funds to support its take-private buyout by investment firms Digital Colony Partners and EQT, is expected to raise the lion’s share of the US$6bn from the institutional term loan market with B2- or B3-rated leveraged loans, according to five sources familiar with the transaction.

Collateralized Loan Obligations (CLOs), the biggest buyers of leveraged loans, have limited baskets for single-B rated (B1/B+, B2/B and B3/B-) debt, but Zayo’s potential transaction is considered a “must-own” that can serve as a shock-absorbing credit capable of performing in a downturn, the sources said.

“Zayo is a strong, defensive play in a non-cyclical industry. That stability goes a long way,” one portfolio manager said. “And internet bandwidth is only going to grow. Zayo’s deal should have natural tailwinds with the investment community.”

Zayo has grown its long-haul fiber routes throughout the US and Europe in recent years. Its service is considered an integral connection between data centers and high-growth companies such as Netflix and Google that require reliable internet connectivity.

Digital Colony and EQT in May agreed to pay US$35 for each Zayo share and assume the company’s US$5.9bn of net debt, valuing the leveraged buyout (LBO) at US$14.3bn.

Credit Suisse, Morgan Stanley, Citigroup, Deutsche Bank, SunTrust and TD Bank provided the approximately US$8.2bn in debt for the acquisition. The Swiss bank will lead any potential institutional term loan B or secured bond sale and Morgan Stanley is expected to coordinate any unsecured bond deal for Zayo, the sources said.

Spokespersons for the banks either declined or were not immediately available to comment. Spokespersons for EQT and Digital Colony Partners declined to comment. A spokesperson for Zayo was not immediately available for comment.


Skeptical investors in the last three months have balked at single-B rated loans, pushing companies for pricing and documentation concessions in exchange for commitments to riskier loans.

In October, winery Cooper’s Hawk and font software firm Monotype Imaging became the latest single-B rated borrowers to accommodate investor demands, following amended transactions from auction house Sotheby’s and digital imaging firm Shutterfly in September.

CLO managers are also reluctant to buy single-B rated debt that they may be forced to shed if these loans are downgraded one notch to triple-C status. CLOs hold more than 60% of the roughly US$1.2trn leveraged loan market and are typically limited on the number of loans they can hold with that rating.

And while Zayo, rated B2/B+, has historically borrowed money at cheaper levels and more flexible terms than other single-B rated credits, it may be compelled to offer more spread and possibly tighter documentation to win over investors with more bargaining power.

“(Zayo) will have to pay up more than usual. But when you look at the pantheon of B3s, this would be one of the strongest ones,” said a second portfolio manager.

In June 2017, the company repriced a then US$1.1bn term loan to 225bp over Libor from 250bp. Since then, however, the average spread for single-B rated borrowers has gapped out as investors have scrutinized private equity-backed LBOs. In October, new single-B loans were offered at roughly 450bp over Libor compared to 380bp a year earlier, according to data from Refinitiv LPC.

“For exceptional B3 names there is demand, but they are requiring a premium,” said one senior leveraged loan banker, citing Cole-Parmer and Hub International as examples of sponsor-backed deals that pushed through October’s difficult marketplace.

On October 28, lab equipment provider Cole-Parmer priced a US$1.09bn credit facility that supports its buyout by investors GTCR and Golden Gate Capital. The B3/B rated company’s US$770m first-lien loan priced at 425bp over Libor, while a US$75m revolving credit facility and privately placed US$245m second-lien loan rounded out the financing, sources said.

On October 18, insurance broker Hub, also rated B3/B, offered a US$1.27bn incremental loan at 400bp over Libor that partially financed a shareholder distribution.

“Not all B3s are equal. A deal like Hub, the market is tripping over itself to own,” a managing director at an investment bank said. “If you’re going to be long in the B3 market, then Zayo is one you’d back. It’s hard to know exactly where it will price, but there is enough depth in the market at a price.” (Reporting by Aaron Weinman. Editing by Michelle Sierra)