Demise of Term Loan A use benefits big banks
LONDON, Aug 9 (RLPC) - The declining use of amortising debt for large European leveraged deals, a feature symptomatic of bull market conditions that maximises underwriters' profitability, is sidelining participant banks and creating a two-tier banking system.
A 635m euros buyout loan backing Pamplona Capital Management's acquisition of French funeral firm OGF is the latest deal to opt out of using a Term Loan A, instead restricting the structure to a 575m euros Term Loan B and a 60m euros revolver.
OGF's loans, which have been underwritten by Goldman Sachs and JP Morgan, may draw in some participant banks on the revolver and TLB, but the expectation is that this will be limited to OGF's relationship banks, given the size of the revolver and the absence of a TLA.
TLAs have traditionally been added to debt financings in order to lure participant banks into a deal through tickets and fees when there is a large revolver that underwriters need to sell. A TLA also makes it easier for a deal to pass credit committees as there is a clear plan for leverage reduction via amortisation payments.
Since companies rarely draw down on revolvers they are opting to take smaller facilities, meaning that underwriters have less risk and do not have the same pressure to bring in participant banks, making TLAs redundant and maximising profits for the lead banks.
Borrowers are attracted to the revolver/TLB structure as a way of keeping more cash in the business; the greater cashflow, in the absence of amortisation payments, enables them to stretch leverage multiples further.
"On significant-sized transactions, the presence of a TLA means giving away chunky fees and diluting underwriters' returns. An all-TLB structure also benefits borrowers as there is greater cashflow, more flexibility and an ability to sustain higher leverage," said a senior leveraged finance banker.
IK Investment Partners' German fire safety firm Minimax Viking also avoided amortising debt on an 800m euros dividend recapitalisation, which includes a 630m euros-equivalent TLB, a revolver and a guarantee facility. The company is refinancing its 2006 LBO debt and 2009 merger debt, both of which had TLAs.
German publisher Springer Science+Business Media declined to include a TLA for its buyout financing, which included a covenant-lite 1.97bn euros dual-denominated TLB and a 150m euros revolver, as well as private subordinated debt.
"Once a new trick is tried on one deal, bankers seem to think it's the market norm. Just because Springer was covenant-lite and had no TLA, the rest followed suit," an investor said. "After covenant-lite, or covenant-loose with aggressive headroom, removing a TLA is the next step."
While investors are pleased with the increase in TLBs on offer, with larger deals opting to move away from amortising debt, participant banks have been sidelined to the mid-market and smaller, less liquid deals.
The continuance of this trend threatens a two-tier banking system in the European leveraged finance market - one that sees a small group of larger banks dominate the bigger deals, excluding participant banks that are then restricted to smaller deals with a quasi-club structure.
"Participant banks structured and positioned themselves out of the market by trying to take on an arranging role and refusing to do other banks' deals - which made the participant bank market too unreliable," the senior banker said.
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