Freescale Nails Tight Pricing In Blockbuster High-Yield Deal

Freescale Semiconductorsecured a lower coupon without tweaking covenants in a $5.95 billion bond offering last Thursday. The deal, which backs the leveraged buyout of the company, was the largest high-yield offering since 1989, when $6.1 billion was sold to support the LBO ofRJR NabiscobyKohlberg Kravis Roberts.

The bonds were first shopped at 9 1/4% for the $2.35 billion eight-year senior tranche and 10 3/4% for the $1.6 billion of senior subordinated notes due 2016. A flood of demand allowed the company to trim the eight-year notes (B/B1) to 8 7/8% and the 10-year notes (B/B2) to 10 1/8%. Both traded above par in the immediate aftermarket.

Investors say they were impressed for a few reasons. The company had a track record: Freescale spun off fromMotorolain 2004 with a BB bond that climbed to investment grade. Bonds fromSunGard,NXPand other technology companies have also traded up this year. And Freescale's revenues look stable as roughly 70% come from products in which Freescale holds a first or second spot in the market.

The issuance included $1.5 billion in eight-year 9 1/8% toggle notes, also sold in the $5.7 billion high-yield deal forHCAthe previous week. Observers said they're likely to remain a feature of large deals. The notes allow Freescale the choice of paying interest or paying in kind for the first four years.

Faced with a $30 billion glut of paper ready to pour through the high-yield pipeline, some portfolio managers had predicted that Freescale and HCA would have to give ground. Instead, Freescale's covenants went untouched. The company, for instance, can add up to $900 million in debt without regard to an EBITDA coverage requirement of 2:1. "It's not very investor friendly," saidRobert Lee, an analyst atKDP Investment Advisors.

That leaves the door open for theBlackstone Groupand other buyout shops acquiring the company to pay themselves a dividend, said one portfolio manager who bought into the deal. "That's a lot under any circumstances," he said, referring to the $900 million limit. "We'll let them get away with it this time."

Pen Pendleton, a spokesman forCredit Suisse, which led the private placement, declined comment. Representatives from Blackstone,The Carlyle Groupand theTexas Pacific Groupalso declined comment. Calls toPermiraand Freescale were not returned.

The HCA and Freescale offerings drained much of the high yield pipeline, which shows $1.2 billion in pending deals and another $15.7 billion left, according to KDP. High yield issuance has already hit an all-time high. More than $217.4 billion in high yield paper has been issued this year, according toDealogic.