A loan syndicate led by Canadian Imperial Bank of Commerce is taking some unexpected good news to potential investors this week: Moody's Investors Service assigned high ratings to a $1.1 billion loan to finance a buyout of Shoppers Drug Mart.
The loan, which will finance Kohlberg Kravis Roberts & Co.'s buyout of Shoppers, had been pegged by bankers as a potential flop, not because of the deal's shaky structure - the loan is secured by company stock rather then tangible assets such as real estate or inventory - but because the loan lacked what bankers call the "greed factor," or fat returns.
CIBC, Bank of Nova Scotia, and Merrill Lynch & Co. are syndicating a $241 million revolving credit facility repriced at the London interbank offered rate plus 300 basis points, a $345 million, seven-year term loan priced at Libor plus 300 basis points, and two institutional tranches of $259 million each, priced at Libor plus 325 and Libor plus 350. The terms were was seen as at or below levels of B-rated loans, and most bankers had expected the loan to carry a B rating.
Fortunes for CIBC changed, however, Friday when Moody's rated the Shoppers loan Ba3, equivalent to a BB-minus rating by Standard & Poor's and a notch higher than many bankers expected. The higher rating is significant because many portfolio managers are restricted from buying loans rated below BB-minus.
Elaine Francolino, a vice president and senior analyst for corporate finance ratings at Moody's, said Moody's considered the thin collateral of the loan. But she said analysts also considered the environment in which Shoppers Drug Mart, a Canadian retail drug chain, would be operating.
"There are lots of demographic factors," Ms. Francolino said. "The populations are getting older, and older people get more prescriptions. The demographics make retail drug stores more stable."
That contrasts with the U.S. drug store industry, which has been battered by too much expansion and price squeezing from health-maintenance organizations, she said. Also, Canada has a nationalized health-care system with fixed costs.
Furthermore, Ms. Francolino said, Shoppers Drug Mart has improved its profitability and efficiency in recent years despite increased competition. "Profit margins are rising as the business is refocused on the core categories," she said.
Asked if the loan's questionable collateral hindered KKR and Shoppers from getting a better rating, Ms. Francolino said, "Any sort of security is a positive. But it's not considered real collateral. It's not as positive of having working assets."
Bankers leading the loan were ecstatic on receiving the rating, and the Moody's comment will be used prominently this week as investors meet with Shoppers management and CIBC in the deal's formal launch.
One banker leading the deal said, "It's going to fly out the door."