LONDON, March 3 (Reuters) - French broadcasting masts operator TDF has followed veterinary pharmaceuticals firm Ceva Sante Animale in opting for a super-aggressive structure for its upcoming 2.65 billion euro ($3.66 billion) buyout loan, despite French deals being unpopular among investors.
Borrowers are pushing the limits of what they can achieve on large buyout loans. Favourable market conditions are allowing them to reduce protection for lenders, including fewer or no covenants in deals and reducing equity contributions.
“We have seen one aggressive deal in France, now two. They are a bad sign as they are setting a very loud precedent,” a leveraged finance banker said.
Investors are wary as the potential dangers of aggressive structures are particularly great in France because of its borrower-friendly restructuring laws. The situation can be difficult for investors if French companies default on their debt, as shown recently by retailer Vivarte, which has seen its loans plummet to deeply distressed levels after announcing it would hold off making any debt repayments.
In contrast to paper from other European countries, secondary prices of French loans have fallen in recent months. Last summer, French, German and UK loans were all trading around the same level but since then German loans have risen about eight points and UK loans about two points, while French loans have fallen 0.5 points, according to Thomson Reuters data.
Banks are lining up about 2.65 billion euros of debt financing for private equity firm Dering Capital to buy TDF. BNP Paribas, Citigroup, Credit Suisse and Goldman Sachs are leading the deal and a second tier of banks made up of Deutsche Bank, HSBC, RBS and Societe Generale has been appointed.
The covenant-loose facility will include senior loans of about 1.4 billion euros and subordinated debt. The aim is to retain as many existing investors in the deal as possible by allowing a cashless roll, to optimise liquidity. Total leverage will be 7.25, while senior leverage will be around 5.75.
The borrower is seeking to include a mechanism more typical of an infrastructure and project finance loan to allow shareholders to take dividends out of the company without having to deleverage. It is likely that total leverage will be able to remain at 6.75.
On Ceva Sante, investors initially said they would need to be compensated for an aggressive structure on its 850m covenant-lite buyout financing, though pricing is expected to come in around 325bp-350bp with a 1 percent floor.
Until the technical conditions plaguing Europe’s leveraged loan market dissipate, cash-rich, deal-starved investors have little choice but to grin and bear it as French deals make up a major component of the deal pipeline.
“As much as the investor base say they are disciplined, if there are not many deals in the market then opportunistic issues can happen - and be successful,” a senior European investor said.
A second investor added: “People are seeing all sorts of things getting done and borrowers are taking a view that investors are desperate enough to invest and will not mind about things they previously did. Investors have to be pretty brave.” ($1 = 0.7240 euros) (Editing by Christopher Mangham)