ServiceMaster Deal Delay Signals Investor Pullback

In the latest sign that investors are demanding more protection and better terms in exchange for financing debt-laden buyout deals, ServiceMaster Co. postponed a $1.15 billion high-yield debt offering on Tuesday.

However, the company is continuing to market a $2.85 billion leveraged buyout loan after being forced to increase the interest rate on the loan twice last week, sources told Reuters Loan Pricing Corp.

ServiceMaster is one of a growing list of highly leveraged so-called covenant-light deals, which lack strong safeguards for investors, that has been forced to improve terms as investors began to reassess credit risk.

Creditors are also resisting payment-in-kind notes that allow companies to defer interest payments in favor of issuing more debt.

Such notes "had become an obvious part of any LBO structure. Now it's not so clear that it's an available option," said Justin Monteith, an analyst at KDP Investment Advisors in Montpelier, Vermont.

The postponement of the ServiceMaster deal follows a week where a number of companies, including Ahold's U.S. Foodservice and Bombardier Recreational Products, postponed loan and high-yield bond offerings.

The changing investor sentiment has been partly driven by worries about the fallout from the subprime mortgage market, including losses at two hedge funds managed by Bear Stearns that invested in securities backed by the risky home loans, as well as a glut of incoming debt supply.

ServiceMaster, a lawn care service and pest control provider, was expected to raise the financing to back its LBO by a Clayton, Dubilier & Rice-led consortium of investors.

"The company probably decided that the PIK (payment-in-kind) structure was important, that they wanted to do it, and that right now people don't want to buy PIKs for these highly-leveraged LBO deals," Monteith said.

"My bet is that they figure they can come back and do this later," he said.