May 22, 2020 / 2:51 PM / 12 days ago

European leveraged loan market reopens for LBOs

LONDON, May 22 (LPC) - French mortgage broker Financiere CEP’s €775m buyout loan has been launched into syndication, with the European leveraged loan market making the first steps since March to reopen for acquisition-related deals.

Lead banks JP Morgan and Nomura identified a window of relative stability, launching CEP’s buyout loan on May 20, and over the next couple of weeks another €10bn of buyout financings are expected to be launched which were underwritten before Covid-19 hit Europe and have been sitting on banks’ balance sheets since.

“The market won’t get back to anywhere near where it was in January, so if banks are sitting on risk and it is pretty big risk in this world, they will start to access this window as long as it lasts through May and June,” a capital markets head said.

As a B2-rated borrower and already well-known in the leveraged loan market, CEP was viewed as a natural candidate to reopen the market.

“CEP is not a very Covid-affected business; it has an existing syndicate and the right rating so it is a natural one to get out there first,” a syndicate head said.

EAGER TO BUY

CEP’s rating makes it more attractive to CLOs eager to buy better-rated assets than the B3 and Triple C rated deals with which they are inundated.

The yield differential in this market between a B2 and B3 rated borrower is 100bp–150bp, several bankers said.

While pricing has not yet emerged on CEP’s seven-year covenant-lite Term Loan B, it has a good chance of coming within the flex.

“Where CEP is fabulously fortunate is that it has B/B2 rating, making a world of difference to CLOs that have an excess of B3 and are terrified of Triple C. CEP will almost certainly have a higher-weighted average spread than most of the deals in a current CLO portfolio, a better rating and some OID, which should make it attractive,” a second syndicate head said.

For similar reasons, banks have held discussions with investors about relaunching a €1.61bn acquisition loan for BB– rated Dutch equipment rental firm Boels, which postponed syndication in March due to adverse market conditions and looks like a natural deal to relaunch given its rating, the sources said.

The seven-year Term Loan B, which was supposed to be priced on March 10, was guided at 300bp–325bp over Euribor and 99.5 OID. While the expectation is that it won’t secure these terms during a second syndication, banks could remain within their flex given the rating, rather than eat into their fees.

However, that won’t be the case for all the loans that were put on hold.

“On all deals the expectation is that the flex will be fully used, but there are some deals where banks will have to use fees as well,” the first syndicate head said.

WAITING IN THE WINGS

Other outstanding buyout financings include Cerelia, a French company that makes pizza dough and cookies; UK-based music-mixing console provider Audiotonix; German pharmaceutical supplier PharmaZell; ThyssenKrupp’s elevators division; UK’s Stonegate Pub; BASF’s construction chemicals business; and French laboratory services group Biogroup LCD.

Many of these will be working on updated financials to provide to investors. At the same time, banks are looking at what concessions, if any, they may need to offer to appeal to investors and unlock additional liquidity.

Possible changes could include anything from a margin increase to the inclusion of a covenant, a Term Loan A and converting a turn of leverage to PIK to improve ratings.

Some loans could even be replaced with bonds as was the case with KKR portfolio company BMC Software, which closed a US$1.35bn three-part high-yield bond this month to back its acquisition of Compuware.

“Banks are holding discovery processes to see how they can make the loans underwritten pre-Covid more palatable. Adding a PIK, doing a bank syndication, upping margins, adding a covenant, going to the bond market or sticking heads in the sand are all possibilities,” the second syndicate head said.

For those loans that require more extensive changes from the terms that were agreed before the crisis, sponsors will need to be understanding.

“The challenge is getting an issuer to give you those changes as it’s guaranteed they don’t exist in the flex. CLOs have capacity issues, so the bond market is a great outlet for shifting risk, but it is a pretty massive ask for someone that has an underwritten loan. Having a covenant in the structure, even if it is a fairly easy bar to clear, will definitely unlock some capacity,” the capital markets head said.

Some are less convinced.

“Sponsors will give people some latitude around docs but not on pricing, structure or covenants. We are all big boys and we have to give what we signed up to. We just need to convince the market,” the first syndicate head said. (Editing by Christopher Mangham)

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