RLPC-UPDATE 1-Brenntag changes 2.5 bln euro loan to allow IPO

* Brenntag asks to repay junior debt with IPO funds

* Company has performed strongly since 2006 buyout

* IPO will reduce leverage to less than three times

(Adds further details, quotes, background)

By Tessa Walsh

LONDON, Nov 20 (Reuters) - Privately-owned German chemical distributor Brenntag is amending its 2.5 billion-euro ($3.72 billion) leveraged loan to allow an initial public share offer, banking sources said on Friday.

The loan amendment, which brings the company's share flotation closer, is offering existing lenders increased interest margins to agree changes which include using the IPO proceeds to repay the company's junior mezzanine loan before senior debt, several bankers said.

"Mezzanine debt is not something that equity investors want in the capital structure when companies are going public," a banker close to the deal said.

Reuters reported in September that Brenntag's private equity owner BC Partners [BCPRT.UL], was planning an equity issue for up to 1.5 billion euros which would be Germany's biggest flotation in years and leave BC Partners with less than 50 percent of the company. [ID:nLM244316].

Brenntag, which employs more than 11,000 people in 64 countries and had sales of 7.4 billion euros in 2008, according to the company's website, is the third European company to seek permission recently from lenders to undertake an IPO and use the proceeds to repay debt in what is expected to become a major trend in 2010.

Brenntag could not immediately be reached for comment.

UK fund manager Gartmore [GRTMO.UL] received lender approval for its IPO on Friday [ID:nLK97140] and French care homes group Medica received approval from its lenders last week. [ID:nLH691062]

Brenntag is asking lenders to allow it to use the proceeds to repay its 390 million euro mezzanine loan, which is expensive and increasing with the addition of payment-in-kind interest, several bankers said.

The company has performed strongly since BC Partners bought the company from private equity firm Bain Capital in 2006, which bought Brenntag from Deutsche Bahn [DBN.UL] in 2004.

Brenntag has outperformed its business plan and delevered to 3.6 times debt to earnings before interest, tax, depreciation and amortisation (EBITDA) from 6.4 times at the time of the buyout, two bankers said.

The IPO proceeds will reduce leverage to less than three times. If leverage is 2.75 times Brenntag will also be able to ask its lenders to repay its second lien loan, the first banker said.

If lenders agree the changes, interest margins will be increased by 175 basis points on the senior debt to around 350 bps on the dollar and euro term loan B and the second lien margin will also be increased to 400-575 bps, he added.

Lenders are being offered a fee of 75 bps, including a 25 bps 'early bird' fee for responses by the first deadline on Dec 4, before a final deadline on Dec 9.

The changes need a two-thirds majority agreement on the senior debt and 50.1 percent on the second lien, the first banker said, adding that the company has not selected its IPO banks yet.

"The company has not picked its IPO banks yet. It wanted to do the amendment first," he added. (Editing by Greg Mahlich)