RLPC-Lenders concerned over European leveraged loan influx
LONDON, July 8
LONDON, July 8 (Reuters) - A recent influx of deals to Europe's leveraged loan market amid volatile conditions is causing nervousness among bankers over a repeat of the summer of 2011, when a number of lenders were left holding paper.
Bankers are having to revisit the pricing, currency and loan/bond split on deals underwritten a few weeks ago, as market conditions have altered. At the same time, deals also need to be more competitive to attract investors' attention as several financings hit the market in a pre-summer rush.
Banks will be eager to sell before August in case the market shuts, as holding on to deals is expensive and banks are less tolerable of it amid growing regulatory pressure.
They will be eager to avoid a situation like in 2011, when banks were left holding LBO loans totalling around 2 billion euros ($2.57 billion) for companies including German outdoor brand Jack Wolfskin, telecommunications company Versatel and French smartcard maker Oberthur.
"We could easily have a situation where there are too many deals and market indigestion. There is a real chance that we get to a situation similar to the summer of 2011, as deals are being underwritten into a softening market," a leveraged loan banker said.
A second leveraged finance banker added: "Any underwritten deal will need to be brought to market speedily. The expectation is that there will be a deluge of transactions in the next four weeks and some will get looked at while others will not. By August, the market might shut and there is a risk that banks get stuck on deals that are perceived as the 'ugly lady on the dance floor'."
Investors had been starved of product earlier in the year and were eager to deploy liquidity but with some 20 deals in the market and more to follow, investors are now more selective over what to commit to and on which terms.
Investors have a choice of a number of leveraged buyout financings, such as global manufacturer Gardner Denver; German publisher Springer Science+Business Media; French calibration services provider Trescal; packaging firm Chesapeake; and Dutch water and coffee company Eden Springs.
There are also a number of refinancings, dividend recapitalisations and add-on facilities being sought for companies including United Biscuits; coffee and sandwich chain Pret A Manger; French mechanical engineering group Spie; sports marketing company Infront Sports; Nordic social and healthcare outsource provider Attendo; Dutch retailer Action; French telecoms group Completel; British Car Auctions; and Dutch retailer Hema.
A number of other deals are set to launch to the market before the summer, including the buyout loans for global IT operations management software provider BMC Software; industrial ceramics firm Ceramtec; and holiday resorts group Club Med.
"Investors will take their time to be picky over which deals to invest in. It is clear investors have liquidity but how much no-one knows as they aren't revealing it, so banks are getting nervous as there are a lot of deals to sell," a third leveraged finance banker said.
Banks will need to have sufficient flex language in documentation to enable them to sell the loans without incurring heavy losses.
"Any deal coming now will come at slightly wider pricing of at least 25 bps. Any bank that does not have enough flex protection to take account of market movement is idiotic," the third banker said.
The 115 million euro Term Loan B for Eden Springs is being offered at 525 bps, a premium compared with other deals in order to tempt investors as the financing is small and will be unrated.
"The pricing on Eden Springs is reflective of the current market conditions. Investors want to be paid for risk and at 525 bps the tranche should clear," an investor said.
An OID on Intertrust Group's 200 million euro add-on facility, which allocated last week, was increased and a ticking fee introduced in order to get the deal done. The facility, which pays 450 bps over Euribor was offered with a 98.5 OID, increased from initial guidance of 99.5. Lenders were offered a ticking fee of 112.5 bps, 30 days after the amendment's effective date, after pushback from investors.
Last week, cable and telecoms investment company Altice dropped a 200 million euro tranche following a lack of investor demand, while the six-year covenant-lite dollar tranche was increased to $1.035 billion from $700 million. The margin is 450 bps over Libor with a 1 percent Libor floor, while the discount was moved to 94 from previous guidance of 98.
It was the second time the deal had been tweaked - at the end of June, Altice reduced the maturity from seven years and flexed up pricing as wider macro volatility impacted the deal. Pricing on the dollar tranche was flexed to 450 bps and was offered with a 98 OID, compared with initial guidance of between 375 bps and 400 bps with a 99.5 OID.
Another revised deal saw the 275 million euro loan refinancing for Charterhouse-owned French call-centre business Webhelp also close with a 25 bps flex on the institutional tranche as a result of market volatility.
Lenders are digesting details of the 2.5 billion euro-equivalent covenant-lite financing backing BC Partner's 3.3 billion euro acquisition of Springer, which is the largest Western European buyout loan since the 9 billion pounds financing backing Alliance Boots' buyout by KKR in 2008.
Credit Suisse, Goldman Sachs, JP Morgan, Barclays, Nomura and UBS have underwritten the financing and are bookrunners and mandated lead arrangers, with the first three banks taking left lead on the deal. Given the scale of the loan package and the cross-border element it is likely to test market capacity and set a precedent for future financings, should it clear the market unhindered.
"In current volatility, deals are clearing the market at different levels depends on size, the credit and whether people know it. Springer, not withstanding current volatility, will be a pretty good proxy for future deals this year and whether they can get done. If it does clear it will give people confidence that big, European covenant-lite deals can get done," a fourth leveraged finance banker said. ($1 = 0.7792 euros) (Editing by Christopher Mangham)
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