LONDON, June 6 (LPC) - Underwriting banks have taken a hit on two European leveraged buyout loans as investors take an unforgiving approach to more challenging credits.
Loans backing private equity firm Advent’s €3bn acquisition of German chemicals group Evonik’s methacrylates plastics unit, Madrid, and Platinum Equity’s acquisition of a majority stake in Spain’s frozen fish producer Iberconsa have been offered at deep discounts, which imply a loss for the lead banks.
Despite having a lot of money to put to work in light of low deal volumes this year, investors are pushing back against more tricky credits, demanding to be paid up or refusing to do them altogether.
Banks have struggled to hit budget in 2019 and event-driven underwrites are one of the few profitable trades left in the market. However, in order to win business banks are agreeing to tight terms that can backfire if a deal struggles.
“It is a hard market to read and whatever you think about whether things are end or late cycle, there are clearly top of the market type deals coming with testy leverage, testy assumptions and testy structures,” a senior investor said.
While Evonik’s €1.785bn loan was hotly anticipated by investors, it has met with some caution.
“Evonik is one of the more complicated commodities-exposed borrowers and is exposed to cyclical downturns,” a senior banker said.
The financing comprises a €965m seven-year term loan B, a €520m-equivalent US dollar seven-year loan and a €300m 6.5-year revolving credit facility.
Both the euro and dollar denominated term loans will price at 500bp over Libor, the wide end of 475bp-500bp guidance and will come at a 95-96 OID, from 99 OID guidance at launch.
At 500bp and 95 OID, the banks will sacrifice most, if not all, of the 1.75% fee offered on the deal. On a collective basis the banks are forgoing around €25m of fees.
“It is a lot of work and time and effort to end up not making any money,” a second senior banker said.
Barclays is lead left on the dollar tranche, while Deutsche Bank and Goldman Sachs are bookrunners. Bank of America Merrill Lynch, Bank of China, Helaba, HSBC, RBC and NatWest Markets are mandated lead arrangers.
Soft-call protection of 101 has also been extended to 12 months from six months, alongside a number of other document changes.
Investors have been asked to recommit to the revised financing by Monday.
“Evonik has very large market share, generates a lot of cash flow and leverage is modest. But there is expected to be a cyclical decline in the next year or two, so there is a bit of nervousness around loan liquidity and the levels it could drop to on the secondary market,” a third senior banker said.
BAML and Santander, alongside Morgan Stanley led a €300m term loan backing the buyout of Iberconsa, which was eventually sold to a number of investors at 700bp over Euribor, at 87% of face value.
In May traditional credit investors were being shown the deal at 600bp over Euribor, at a 98 OID.
While sponsors and banks have pre-agreed levels of flex that vary on a deal-by-deal basis, it is likely that even in the event of very generous flex terms, the banks will be out of the money at the new levels.
Platinum is a ‘special sponsor’ of BAML, sources said, adding the bank would have done this as a favour to them.
“Even 600 at 98 was most probably not the starting point to sell this deal. At 87 the banks are taking a hit,” a loan syndication head said.
An investor added: “87? Ouch.”
The loan ended up selling to a number of funds, including direct lenders, which is not a traditional pool of investors for banks to approach. Direct lending funds are, however, more open to taking riskier, higher yielding paper.
Direct lenders have a lot of money to put to work and at this price, the loan was oversubscribed and funds were scaled back.
The loan proved a hard sell given the sector and the jurisdictions Iberconsa has exposures to, including Argentina, Namibia and South Africa.
It has risk due to the underlying commodity, fish and price volatility. The company has sales in euros to Spanish suppliers, while its costs are in dollars for the workforce. The fishing rights are in Argentina and Namibia and are subject to government risk, another investor said. (Editing by Christopher Mangham)