RLPC-European firms move to I-grade loan structures to cut costs

LONDON Mon Aug 19, 2013 12:06pm EDT

LONDON Aug 19 (Reuters) - British motoring services firm the Automobile Association (AA) has completed a refinancing exercise that will see it become a Triple B rated investment-grade company.

The exercise is the latest of a flurry of deals that see borrowers transition away from leveraged debt structures to more corporate style structures, reducing financing costs, increasing flexibility and providing easier access to debt capital markets.

The loans are attractive to both investment-grade lenders that see much higher margins - around 200 basis points (bps) difference - than on investment-grade rated deals often for only a one or two notch ratings difference, as well as to deal-starved leveraged loan investors, which are willing to lend to borrowers of improving quality for lower margins than seen on leveraged financings.

"Investors are lowering the pricing they will accept on a deal if they really feel the credit is good quality and it makes sense. A typical leveraged loan investor could be prepared to drop the interest payments they receive to around 250 bps on a crossover deal," a senior leveraged loan investor said. "There is always an attraction for a crossover credit on the way up as they are good credits, if they are on the way down it is a completely different story."

The AA's five-year term loan was reduced to 1.4 billion pounds ($2.19 billion) from 1.775 billion pounds after the company tapped its Class A bonds for 350 million pounds of additional funds. The term loan had already been reduced from an initial 1.9 billion pounds after the AA placed 625 million pounds of Class A Bonds in June, an increase from the 500 million pounds originally mooted.

There is also a 150 million pound five-year working capital facility and a 220 million pound 364-day liquidity facility, which were both expected to remain largely with the arranging banks.

The term loan pays an initial interest margin of 275 bps over Libor with price step-ups over time, the working capital facility pays an opening margin of 325 bps and the liquidity facility pays 275 bps out of the box.

Arrangers on the financing were Deutsche Bank, Royal Bank of Scotland, Bank of America, Bank of Tokyo-Mitsubishi UFJ, Barclays, HSBC, Lloyds TSB Bank, Royal Bank of Canada and UBS.

The loan and bond financing paves the way for the AA's split from Acromas, which also owns over 50s insurance firm Saga. Most of Acromas's 4 billion pounds debt pile will be left in the AA, leaving Saga able to pursue an IPO with relatively little debt.

Acromas, which is owned by private equity firms Charterhouse, CVC and Permira, was formed in 2007 at the peak of the market through the 6.2 billion pounds merger of the AA and Saga.

MOVING ON UP

In July, Irish paper and packaging company Smurfit Kappa Group completed an unsecured 1.375 billion euro ($1.84 billion), five-year deal marking the migration of the company's credit profile from leveraged to corporate.

The financing, which was co-ordinated by Royal Bank of Scotland, comprises a 750 million euro term loan paying 225 bps over Euribor and a 625 million euro revolver paying 200 bps over Euribor, a reduction from previous margins of 375 bps and 325 bps, respectively.

In addition to the new loan, collateral securing the obligations under the SKG's various outstanding senior bonds and debentures has also been released, meaning the bonds and debentures are now unsecured.

German forklift truck maker Kion, which was bought by KKR and Goldman Sachs in 2007 backed with 3.1 billion euros of leveraged loans, has also put its financing on a more corporate footing after its June IPO saw net financial leverage cut from 2.6 times to 1.4 times.

In July, Kion agreed a 995 million euros, five-year revolver with a group of relationship banks including Deutsche Bank, Morgan Stanley, BNP Paribas, Commerzbank, Societe Generale and UniCredit Bank. The financing pays a margin ranging from 150 bps to 300 bps depending on total net debt to consolidated Ebitda, and contains only one covenant.

About 175 million euros of the facility will be drawn to repay senior secured FRN due in 2018.

After the loan repayment, the conversion of a shareholder loan as part of the IPO, and the repayment of the FRN, Kion's remaining term debt comprises a 325 million euros senior secured high-yield bond due in 2018 and a 650 million euros senior secured high-yield bond due in 2020, which was issued in February to replace loans maturing in 2014 and 2015.

The improvements to Kion's financial structure saw Moody's upgrade Kion's corporate family ratings by three notches to Ba2 on July 2, while Standard & Poor's increased Kion's CFR rating to BB- with a positive outlook on July 5.

Another private equity-owned company that has recently moved towards an investment-grade corporate structure is Swedish surgical and wound care product maker Molnlycke.

Molnlycke agreed an all-senior debt refinancing in July, which saw private equity owner Investor AB increase its equity in the company by around 550 million euros, including the conversion of 220 million euros of mezzanine debt. The refinancing will help lower financing costs and enable Investor to pay itself dividends.

Molnlycke's 2007 buyout was backed with a 2.25 billion euros leveraged loan arranged by HSBC, Morgan Stanley and SEB.

Before the refinancing, Molnlycke's leverage had already been reduced from 9 times in 2007 to 4.1 times through earnings and cashflow. After the refinancing, leverage levels will fall to around 2.5 times 12-month rolling Ebitda. ($1 = 0.6381 British pounds) ($1 = 0.7490 euros) (Editing by Christopher Mangham)