RLPC-European leveraged loans attractive after dollar pricing rise
LONDON, June 2
LONDON, June 2 (Reuters) - Recent weakness in the US leveraged loan market is making it more expensive for European companies to raise dollar debt in transatlantic deals and is encouraging them to return to European investors and a revitalised European market for euro-heavy deals.
The move back to euros after years of cheaper dollar funding also means that there is more chance of seeing more European-only covenant lite loans similar to French vetinary pharmaceutical company Ceva Sante Animale's 818 million euro ($1.12 billion) buyout loan, as European investors have now accepted the US practise and euros are now cheaper than dollars.
Spanish olive oil bottler Deoleo opted for an all-euro deal and dropped a dollar tranche on a 600 million euro loan last week, after dollar investors held out for higher pricing and refused to be priced tighter than the euros.
Bankers are aiming to tap as much euro liquidity as possible for the 7.5 billion euros of loans that will refinance debt in Dutch coffee and tea company DE Master Blenders 1753 and back its merger with the coffee business of Mondelez International.
Europe's technical leveraged loan market is looking more attractive as investors compete to lend as demand far outweighs supply. Increasingly selective US investors, however, are calling for improved terms on a glut of new deals as retail fund cash continues to exit the market.
"European investors can now compete against dollar investors (on cross-border deals) due to a softening US market and strengthening European market," a leveraged banker said.
European companies started to raise transatlantic loans in late 2011. Netherlands-based broadband provider UPC Holdings was the first to refinance in the US as the European market struggled to issue large leveraged loans and high yield bonds amid the Eurozone crisis.
US investors were far more liquid than their European counterparts at that time and dollars were cheaper than euros as European banks struggled to finance buyouts and dollars remained scarce and expensive.
Euro tranches were priced 25bp-50bp higher than dollar tranches until early 2014. Margins and Libor floors are now equal but dollars are more expensive after swap costs are included. Euro tranches are also seeing tighter Original Issue Discounts (OIDs), due to stronger demand.
European companies are reducing uneconomic dollar tranches in favour of larger euro tranches or are stripping dollar tranches out altogether.
Deoleo's loan refinancing included a 460 million euro term loan B (TLB) priced at 350bp with a 1 percent floor, a 99.5 OID and 101 soft call for six months. The deal also included a 55 million euro second lien tranche, priced at 675bp with a 1 percent floor, 99 OID and a hard call of 102, 101.
Some of Deoleo's TLB was originally expected to be denominated in dollars. The dollars and euros priced at 350bp but dollars were more expensive after withholding tax of 10-25 percent for Spanish companies was factored in. Bankers said that a 25bp discount on the dollar tranche would still have made it economic, even after the witholding tax.
Other recent deals with identical euro and dollar pricing levels include Luxembourg-based ink and pigment firm Flint and advisory firm Environmental Resources Management (ERM), which were both completed in May.
Pricing on Flint's 1.7 billion euro-equivalent covenant-lite buyout loan widened by 25bp on both tranches to 375bp from initial guidance of 350bp. The euro tranche could have priced at 350bp after strong demand, but the US tranche was competing with a surplus of US leveraged loans and a softening secondary market and saw less demand.
Flint's euro first lien tranche allocated with a 99.5 OID and the US tranche allocated wider with a 99 OID.
The euro tranche of ERM's $950 million covenant-lite dividend recapitalisation was almost doubled to 75 million euros from 40 million euros at launch, after good demand from European investors and the dollar and euro first lien loans priced at 400bp. The dollar portion allocated at 99, while the euro portion allocated tighter at 99.5.
The inversion of the euro-dollar price relationship is making the argument for tapping the US market less compelling and arranging banks are less able to arbitrage between markets and play investors off against each other to achieve momentum on deals and the best price for borrowers.
"The US is not as much of a threat as it used to be and competitive tension has reduced. European investors aren't pushing back as they need supply to feed the beast, and are being very competitive on pricing," a second leveraged finance banker said.
The increasing appeal of Europe and euros means bigger euro tranches, in contrast to last year, when euro tranches were reduced or cut out altogether on deals such as the $9.5 billion term loan which backed the $28 billion buyout of HJ Heinz.
More all-euro deals are expected. A 430 million euro-equivalent loan financing for Alstom Auxiliary Components, which is being sold by French engineering group Alstom , could follow Deoleo and drop the dollar tranche on its 310 million euro TLB, bankers said.
"You have not seen deals recently where European tranches have downsized dramatically or been crushed or taken out such as Heinz. Now that the European market is stronger, it is possible that the European tranches will be increased. It means that there is a far greater chance of seeing more European only covenant lite deals," the second banker said. ($1 = 0.7328 Euros) (Editing by Tessa Walsh)