LONDON, Sept 28 (Reuters) - US buyout firm Leonard Green & Partners has picked lenders that are not subject to regulatory guidelines to lead a US$1.7bn debt financing backing its acquisition of UK intellectual property services provider CPA Global, banking sources said.
Jefferies and Nomura underwrote a senior debt financing of around US$1.2bn backing the highly leveraged acquisition and have been joined by underwriters KKR Capital Markets and Macquarie, the sources said.
None of the four lenders are subject to lending guidance from US or European regulators and can offer high leverage levels on buyout loans as a result.
Leverage on the deal is 5.5 times senior debt and 7.8 times total debt, in excess of existing US Leveraged Lending Guidelines and similar European guidance, which comes into effect in November, that seeks to limit leverage to 6.0 times total debt to Ebitda.
Leonard Green & Partners were not immediately available to comment.
The regulations say that leverage over 6.0 times “should remain exceptional” and companies should be able to repay at least half of total debt over five to seven years.
Private equity firms have taken advantage of deep liquidity in the US and European leveraged loan markets in recent years to secure aggressive terms including higher leverage, lower pricing and weaker documentation.
While the regulation was introduced to curb risky underwriting, institutions that are not subject to the rules are now enjoying a competitive advantage as they are able to offer more debt and higher leverage.
Nomura was the sole underwriter of a €1bn-equivalent leveraged loan financing backing Caisse de depot et placement du Quebec’s 46% equity investment in French medical diagnostics company Sebia, which has leverage of 8.0 times debt to Ebitda and closed this week.
While regulated banks struggle to arrange highly leveraged loans, investors are willing to buy them as demand continues to far outweigh supply in the Transatlantic leveraged loan markets.
Leonard Green & Partners announced the acquisition at the end of August for an undisclosed sum, although sources close to the deal put the price tag at £2.4bn.
Although CPA’s financing is highly levered, the company is performing strongly and has around £120m of cash flow per year and Ebitda of £157m, the sources said.
“CPA is an extraordinarily good credit, it is a strong performer and a cash cow,” a senior banker said.
The sale attracted interest from several private equity firms including Astorg and PSP, Apax, CVC, Hellman & Friedman, KKR and Permira, but many dropped out due to the high purchase multiple of around 15.5 times, sources said.
Other buyout firms that had been looking at the business had offers of committed debt financings from lenders, including regulated banks, with leverage of up to 9.0 times debt to Ebitda, one of the sources said.
The financing backing Leonard Green & Partners’ buyout comprises an US$830m term loan led by Jefferies and a €250m term loan led by Nomura, with price guidance of 325bp over Libor and Euribor, with a 0% floor and a 99.5 OID, the sources said.
An additional €410m of subordinated debt that resembles a PIK toggle has been preplaced with a Goldman Sachs fund and an £80m revolving credit facility is also included, the sources said.
High leverage and relatively low pricing does not seem to have deterred CPA’s large existing investor base. Initial indications show that the loan is already fully subscribed, well before the commitment deadline of October 10, the sources said.
“There are a lot of existing lenders and it (CPA) has a reasonable following,” an investor said.
Vendor Cinven hired Goldman Sachs and JP Morgan to advise on CPA Global’s sale and first round bids in the auction were due in July.
Cinven bought CPA Global in 2012 from Intermediate Capital Group and the founder shareholders for around £950m, backed with £555m of debt financing. (Editing by Tessa Walsh)