LONDON Aug 4 Europe's leveraged loan market is
experiencing real pricing differentiation where assets are being
assessed on credit fundamentals, eroding the standard wholesale
pricing model that has defined the market up to now.
A healthy supply/demand balance, a vast amount of liquidity
and a recent flood of deals, means credits are clearing with
different interest margins and discounts. This has broken the
mould of deals reverse-flexing in a quiet market and flexing up
in a busy market.
"This is the first time there has been true pricing
differentiation in Europe," a senior leveraged loan banker said.
"The market is very busy but there is also an enormous amount of
liquidity so it has created the perfect storm for the market to
behave more maturely. When it got busy previously the entire
market repriced irrespective of credit quality. In a quiet
market, lower-quality assets would reverse-flex due to demand."
Recognising yield and credit differentials is something that
is common in the US market but has escaped the less liquid, less
busy European market.
The roughly 25 leveraged loans syndicated in July, coupled
with large amounts of liquidity from new CLOs, credit funds and
repayments, has prompted the European market to act more like
its US counterpart when it comes to pricing risk.
"The European market has been perceived as being junior to
the US market for years and this is the first evidence of a more
mature European market," the banker said. "Managers have choice
and are performing a function by selecting a credit over another
credit, which is reflected in the pricing."
GONE DOWN WELL
A number of deals were well-received by the market and
reverse-flexed, including those of drug capsule-maker Capsugel,
which reduced an interest margin to 275bp from 300bp, and French
medical diagnostics company Sebia, which finalised at 325bp at
par from initial guidance of 350bp at 99.75.
Other deals did not fare as well. Healthcare firm
Independent Clinical Services ended up paying 525bp with 98.5
OID from initial guidance of 450bp. Dutch TV company Endemol's
1.1 billion euro (1.48 billion US dollar) dividend
recapitalisation widened spreads to 525bp on a euro first-lien
from 475bp and the OID increased to 98 from 99. German plastics
maker Styrolution also widened guidance on a euro first-lien to
400bp-425bp from 350bp-375bp, while the OID widened to 99 from
Although pricing differentiation is a useful tool, investors
doubt whether higher yields can clear some of the trickier
assets. They also doubt whether good-quality assets will keep
the investor bid if they reverse-flex too tightly.
"There are one or two credits that no one likes so they are
cranking up the margin and putting more OID on, such as
Styrolution and Endemol," an investor said. "At the other end of
the spectrum, people are still being very greedy and trying to
be super tight."
A 500 million euro term loan for institutional investors
backing an acquisition of healthcare firm Generale de Sante
reverse-flexed to 350bp from 375bp. The deal is on a ratchet and
pricing could reduce further to 325bp if leverage falls below
3.5x. The reverse-flex led some investors to reduce or withdraw
their initial commitments.
"The pricing on Generale de Sante was well below what
leveraged investors can do," a second banker said. "Most
investors need at least 400bp and this was 350bp with no floor.
Given the rating of the company they could do it but it was more
one for the banks in the end rather than the real leveraged
Some arrangers began to factor in pricing differentials for
deals later in July in an attempt to avoid pricing flexes and to
get deals cleared before the summer. Germany-based automotive
engineering company Amtek Global Technologies' 275 million euro,
five-year Term Loan B launched at 550bp and is expected to carry
a 98 OID.
"Amtek is a difficult deal and has all sorts of issues," a
second investor said. "The pricing reflects that."
The emergence of healthy pricing differentiation in Europe's
leveraged loan market has been welcomed by arrangers and
investors but some say its continuation is based on fragile
dynamics and could be shortlived if deal flow falls in the
"Lots of supply and lots of demand have driven the healthy
dynamics that emerged in July and who knows if it will last
going into the autumn," the first banker said. "The danger is
that if the market goes back to a situation where there is a
lack of supply, investors will once again have to take credits
on terms that they would prefer not to."
(1 US dollar = 0.7454 euro)
(Editing by Christopher Mangham)