SLH

By Sam Goldfarb and Liz Hoffman 

Goldman Sachs Group Inc. is struggling to sell $2 billion in bonds backing the buyout of software firm Solera Holdings Inc., another sign of cracks in the market for the low-rated debt that has been a key driver of the takeover boom.

Solera's sale to Vista Equity Partners was one of the biggest leveraged buyouts of last year, at $6.5 billion including debt, and has been widely viewed as a test of the credit market.

The bond sale comes at a time when U.S. junk-bond issuance has dropped more than 70% from a year ago and borrowing costs have increased, as risk-averse investors back away from riskier securities or demand sweeter terms.

The pullback threatens a mergers-and-acquisitions boom that has been driven partly by cheap and available credit. It also comes as a wave of debt from the last buyout boom is coming due, raising the specter of defaults or, at the very least, the prospect that borrowers could be forced to refinance on less-hospitable terms.

Solera's bonds carry a Caa1 rating from Moody's Investors Service, which is where some of the worst market carnage has taken place in recent months as investors dial back their risk taking. U.S. junk bonds last year posted their first annual decline since 2008, reflecting a broad retrenchment in the lowest reaches of the market.

Demand for the lowest-rated debt "is really nonexistent now," said Matthew Duch, a portfolio manager at Calvert Investments.

Defaults are expected to rise in 2016 after spending much of the postcrisis period below historical averages, according to Moody's. U.S. companies have $1.3 trillion in junk debt maturing between now and 2020, according to S&P Ratings Services. An important test case is Toys "R" Us, which has $1.6 billion in debt coming due through 2020, much of it left over from its 2005 buyout.

Goldman originally expected to sell the Solera bonds at an annual yield of about 10%, investors said. But by midday Thursday, it had found buyers for only about half the bonds, and pricing expectations had moved above 11%. The sale, which had been expected to close Thursday, may be pushed to Friday or into next week, investors said.

The bond sale has proved a tougher task than Solera's $1.9 billion offering of leveraged loans backing the deal. One option is for Solera to sell fewer bonds and increase the size of its loan, people familiar with the matter said.

Painful for buyers, the pullback promises to be equally uncomfortable for banks, which earn big fees from lending commitments. In good times, the deals are safe because the debt is easily sold to other investors. But in a crunch, banks can be forced to keep it on their balance sheets and hold capital reserves against it, which hurts profitability.

Goldman, in particular, has sought to become a bigger player in lending to back deals, a corner of Wall Street historically dominated by commercial banks such as Bank of America Corp. and J.P. Morgan Chase & Co.

Should such loans become tougher to unload or replace with bonds, banks may become choosier about deals to back.

LeasePlan International NV last week shelved a EUR1.55 billion ($1.71 billion) bond sale after failing to attract enough investor interest. Banks were forced to fund Endurance International Group Holdings Inc.'s acquisition of email-marketing firm Constant Contact Inc. after failing to find buyers for $1.1 billion of buyout debt.

There are signs that investor wariness is extending to higher-rated borrowers. Insurer CNA Financial Corp., whose debt is rated investment grade, last week trimmed the size of a bond offering and raised the interest rate after investors balked at the initial terms.

Federal Reserve Chairwoman Janet Yellen, in congressional testimony this month, listed higher borrowing costs for riskier firms among factors that could weigh on economic growth in coming months.

Solera negotiated its sale in September, just as problems were starting to emerge in the market for risky debt. The company fast-tracked its auction process to stay ahead of volatility in the financing market, and at least one interested party declined to bid because it was concerned it couldn't raise the needed debt, according to a regulatory filing and a person familiar with the matter.

The deal risked running afoul of regulators, who frown on transactions carrying debt higher than six times earnings before interest, taxes, depreciation and amortization, a measure of cash flow. Solera was predicting about $493 million in 2016 adjusted Ebitda.

To ease concerns, affiliates of Goldman Sachs and Koch Industries Inc. agreed to buy up to $800 million in preferred shares to fund the deal. Such investments, while they pay a fixed debt-like return, are treated as equity and would help keep Solera's debt ratio in check.

Apollo Management Group LLC's pending $6.9 billion buyout of ADT Corp., announced earlier this month, also hinges on an investment from Koch. Issuing preferred shares is expensive, and is often a sign that more traditional debt sources are tapped out.

The biggest leveraged acquisition of last year, Carlyle Group LP's carve-out of Symentec Corp.'s data-storage business, also has hit a debt snag this year. Carlyle lowered its purchase price last month amid financing pressures, people familiar with the matter said.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

February 25, 2016 19:17 ET (00:17 GMT)

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