August 7, 2017 / 4:55 PM / 2 years ago

LPC-Investors pay to join Avast's acquisition add-on loan

LONDON, Aug 7 (Reuters) - A €117m-equivalent acquisition add-on loan for Prague-based security software company Avast Software has allocated over face value or par, which means that investors are paying to lend in another sign of an overheated market, sources said on Thursday.

Investors are paying 50bp to join the deal, which allocated on July 28 at 100.5 when the deal broke for trading in Europe’s secondary loan market, the sources said.

Conditions in Europe’s primary leveraged loan market are as aggressive as they have been since the financial crisis, which continues to put pressure on pricing, fees and terms.

Although many loans are trading over par after allocating as demand for deals continues to outstrip supply, Avast is the first European deal, and one of a handful of credits globally, to allocate over face value, sources said.

“This is very top of the market stuff. This type of thing was discussed in 2007 and I’ve heard a number of arrangers say since then how ridiculous it was that it was ever considered. But now it has actually happened,” an investor said.

Avast, which is owned by private equity firm CVC, launched the add-on loan with a US$50m tranche and a €50m tranche to finance its acquisition of UK-based Piriform.

The terms of the add-on loan were in line with Avast’s existing US$1.21bn term loan and €445m term loan. That deal was repriced in March to 325bp over Libor with a 1% floor and 350bp over Euribor with a 0% floor, respectively and have 101 soft call in place until September 30.

The euro tranche of the add-on loan was increased to €75m, but the loan was still oversubscribed, the sources said.

The company was unable to increase the loans further for fear of risking its BB credit rating and could not reduce the margins as it was within its soft call period. The add-on was also too small and illiquid to create a new standalone loan.

Sole arranger Credit Suisse came up with the idea of issuing the loan above par which caused some investors to drop out, but enough stayed to issue the loan at 100.5, sources said.

Avast kept the extra 50bp which it added to its balance sheet, the sources said. The company’s loans subsequently traded up to 100.8 on the dollars and 100.9 on the euros, according to Thomson Reuters LPC data.

SPECIFIC CIRCUMSTANCES

Avast’s circumstances were specific as the company was within its call period, its loans were trading over par and it was financing an acquisition.

Par plus allocations could been seen more regularly, however, as private equity firms following buy-and-build strategies try to grow portfolio companies through acquisitions.

“It is likely these things will all happen again and paper for other borrowers will issue with a premium,” a leveraged finance head said.

Original Issue Discounts (OIDs) are common in the loan market, which effectively offer investors a fee to buy the loans.

Par plus allocations are the opposite concept and have yet to be officially named although lenders are coming up with ideas, including an Original Issue Premium (OIP) and A Negative Original Issue Discount (ANOID).

“ANOID seems most appropriate as it is nuts that investors have agreed to this, however it is likely we will see more on oversubscribed deals. If sponsors can get away with it, good for them…” a second investor said. (Editing by Tessa Walsh)

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