RLPC-Loan market set to profit from Master Blenders' jumbo deal

LONDON Fri May 16, 2014 10:19am EDT

LONDON May 16 (Reuters) - Dutch coffee and tea company DE Master Blenders' 7.5 billion euro ($10.29 billion) loan to refinance a hugely successful deal in 2013 and raise new money to back its merger with the coffee business of Mondelez International will soak up a lot of excess liquidity in the market, banking sources said.

The all-loan financing will be the largest leveraged loan issued by a European borrower since the 9 billion pound ($15.12 billion) financing backing the Alliance Boots buyout by KKR in 2008, providing a boost to Europe's leveraged loan market which has been plagued by a lack of M&A in 2014, according to Thomson Reuters LPC data.

"Banks and investors are crying out for more event-driven activity and the market feels ripe for more M&A. The Master Blenders deal is exactly what the loan market needs," an investor said.

As part of the merger, Mondelez will receive around $5 billion in cash, as well as a 49 percent equity stake in the new company, which will be called Jacobs Douwe Egberts. The M&A is expected to close in 2015.

The $5 billion of cash is expected to be in the form of a leveraged loan denominated in euros and dollars and will form part of a larger financing package as Master Blenders refinances a 3.3 billion euro loan put in place last year to back a 7.5 billion euro acquisition by Joh A Benckiser. The new loan is also expected to include around 500 million euros of undrawn facilities.

JP Morgan, Bank of America Merrill Lynch and Morgan Stanley are leading the financing, which is expected to launch for syndication to other banks and institutional investors in the coming weeks.

ALL LOANS

The borrower is opting for an all-loan deal, shunning the bond market to take advantage of the more flexible, private and cheaper loan product.

"A loan can be prepaid at par as there aren't any non-call features. It is also a private instrument which means the borrower doesn't have to blast information about the company across the world," a second investor said.

A bond would require financial statements that reflect the combined businesses so the company would need to take out an expensive bridge loan before it could be in the position to issue bonds. Bonds also go into escrow and require the borrower to pay a full margin straight away, whereas loans are cheaper as they allow a borrower to pay a ticking fee.

The loan market has the capacity for such a large financing but the deal will need to be priced correctly in terms of interest margins and ticking fees if it is to tap all the liquidity needed during primary syndication and maintain a good level in secondary.

Loans in Dutch cable company Ziggo traded lower on the secondary markets as it paid a margin of 300bp, tighter than the other deals by the same owner Liberty Global. It is also still paying a ticking fee.

"Bankers need to be cognisant of pricing as a lot of investors will earmark a substantial amount of cash for the Master Blenders deal which will not fund for quite a long time. Lenders need to be compensated," the first investor said.

A third investor added: "Ziggo was a delayed process where the deal got done but the loan traded off because it wasn't funding and people were not being compensated. In Europe, a lack of attractive ticking fees is a problem especially in Master Blenders' case if investors have to wait until 2015."

KEEPING COVENANTS

In order to keep a large number of existing banks in the deal and attract new banks, the deal is expected to be covenant-loose and retain leveraged and interest covenants, as opposed to being covenant-lite.

French cable company Numericable lost a lot of liquidity when a number of banks couldn't cashless roll into its new covenant-lite loans that backed its acquisition of Vivendi's telecom unit SFR and refinanced existing debt.

Only a limited number of CLOs that invested in Master Blenders' 3.3 billion euro loan last year will be past reinvestment period but the company is still considering allowing lenders to cashless roll into the refinanced loans via an amendment.

If a cashless roll were to occur, there could be different pricing for the refinanced money and new money.

"The US market has softened in recent weeks and pricing has widened by 50bp-75bp as a result. Master Blenders could pay around 350bp with a 75bp floor," a banker said.

The 2013 3.3 billion euro leveraged loan comprised a 1.25 billion euro TLA, a 300 million euro revolver; a 1 billion euro institutional TLB2, all paying initial margins of 350bp over Euribor, along with a 750 million TLB1 paying 375bp. ($1 = 0.7291 Euros) ($1 = 0.5954 British Pounds) (Editing by Christopher Mangham)