LONDON, July 16 A recent flood of leveraged loans in Europe are facing the prospect of investor pushback over the summer months as investors, spoilt for choice for the first time this year, become more selective over what loans to invest in.
Lenders have been asked to commit to around 20 leveraged loans totalling approximately 13 billion euros-equivalent ($17.59 billion) by the end of July.
About ten bank meetings have taken place this week, a stark contrast to the rest of the year, which has seen a lack of deals and very little choice for investors.
Technical conditions meant Europe avoided the pushback experienced by the US market earlier this year and European investors accepted increasingly aggressive terms from borrowers on even-driven financings, refinancings, dividends and repricings.
The recent spate of deals means Europe is now at a tipping point where investors look likely to call the shots on current deals in the market.
"Borrowers have tried to avoid August and the slow summer months by rushing to get deals out in July. It makes sense that all these deals have come to market now but if I had a deal, it would be tempting to wait until after the summer in order to avoid getting lost in the crowd," an investor said.
Investors and bankers agree there should be enough liquidity to finance the deals in the market following a number of repayments from loans that have exited to the high yield bond market or opted to list. Liquidity has also been bolstered by new CLO issuance, which contributed 2.5 billion euros of new money in June.
The two main challenges to successful syndication are the tight timetables investors have to comply with and pricing.
With restricted time to look at all these deals, investors will focus on the better quality credits and cherry pick the best ones to invest in.
"The initial concern is whether the market can cope. There is no question regarding liquidity as the money is there. There is a capacity issue as there are a lot of deals to look at and that takes time. If a deal doesn't feel as though it will work, investors are likely to drop it quickly and move onto the next," a senior banker said.
Investors will be investing in the better quality assets and will also want to be paid for commitments to certain deals. There will be differentiation between assets and pricing rather than investors taking a blanket approach to deals.
"Investors will be picky. Rather than suddenly every deal having to come at 98.5 or flex up, good deals will get done bad deals may not get over line. There will be more differentiation rather than a wholesale price increase," the investor said.
The differentiation will bring back a certain element of market discipline that has been absent this year on certain deals. Investors are expected to be far more vocal on what they like and don't like.
Deals in the market include healthcare firms Quiron, Generale de Sante, Independent Clinical Services, Sebia and Vedici; energy and insurance company Delek Europe; drug capsule maker Capsugel, Belgium-based Continental Foods; Gas Natural's telecommunications affiliate GNFT; Swiss sports marketing company Infront; Materis' paint manufacturer Paints and cement producer Chryso; French underwear maker DBApparel; Germany-based plastics maker Styrolution; Dutch TV production company Endemol; ports services company HES Beheer; German publisher Springer Science+Business Media and German pharma company Aenova.
"The number of deals in the market makes it harder for arrangers but it introduces more discipline and creates a proper market where investors are not forced to take very deal," the senior banker said.
A second banker said: "There will be winners and losers. When investors have a lot to choose from, big is good such as Quiron, while a chequered history is bad like with Endemol."
Arranging banks are expected to be more cautious when underwriting new deals as investors become more selective. The very top sponsors will attract better terms than weaker sponsors as they are trusted more and have higher deal flow, so bankers will want to stay close to them, bankers said. ($1 = 0.7389 Euros) (Editing by Christopher Mangham)