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LONDON, Jan 28 (LPC) - A billion pound-plus financing backing UK life sciences group LGC’s buyout has highlighted the “fly or bye” mantra from investors that emerged in late 2019 and is now a chief characteristic of the leveraged market, where terms are dividing drastically between the strong and more risky credits.
LGC’s buyout loan was increased by £40m to £1.082bn, following strong investor demand, while the equity cheque was reduced, inflating leverage on the deal. At the same time pricing was lowered.
“There will be differentiated outcomes when lending on credits and LGC is a case in point for a strong credit that is a fairly safe buy,” a senior banker said.
Towards the end of last year, pricing varied by around 300bp between the stronger, well-liked credits and borrowers perceived as riskier. Aggressive features in documentation terms were wide-ranging too. In some extreme instances, banks were left hung on financings, unable to sell the paper during syndication.
Increasing equity and reducing debt does not happen often once a deal launches for syndication but the popularity of LGC made it possible.
“Senior debt is the cheapest part of the capital structure and therefore if they can do more of it, it saves them money later and improves the return,” a second senior banker said.
The company also flipped the sizes of the euro and US dollar tranches to match cashflows, so the covenant-lite loan now comprises a €510m tranche and a US$850m tranche. At launch, the euros were around the size of the dollars and vice versa. This has disappointed euro investors, eager to book the paper.
As a result, pricing tightened on the euro tranche to 325bp over Euribor at par from initial guidance of 350bp-375bp, and the dollar tranche reduced to 350bp over Libor at par from initial guidance of 375bp-400bp. Both loans were initially guided at 99.5 OID. A 0% floor and 101 soft-call protection for six months remain the same.
At 325bp, a number of euro CLOs were priced out of the deal as the arbitrage stopped working. However, with the high-yield bond market offering extremely tight pricing, the leveraged loan market is having to tighten to remain competitive, sources said.
“LGC is one every investor in the market liked and everyone wants to own a piece of. Some will get priced out on the euro side at 325bp but it is a well sought out credit,” the first senior banker said.
Net senior leverage rose to 6.4 times from 6.1 times as a result of the increase in debt. Leverage rose to more than nine times after the increase, if a £500m-equivalent PIK is included.
“GOOD IS EASY”
“It is further evidence of increasing bifurcation of the market and not just on a good credit versus bad credit basis but the delinking of credit judgement with appropriate leverage. If a credit is liked, investors will do it no matter what the leverage is. Good is easy,” a third senior banker said.
The pre-placed PIK was provided by institutions including Goldman Sachs, Park Square and Partners Group.
However, from an investor perspective, PIKs can basically be treated as equity, rather than subordinated debt.
“Investors have a blind spot towards PIKs because if a borrower doesn’t pay cash interest on a PIK it doesn’t blow up in everyone’s face,” the third senior banker said.
The financing also comprises a £265m revolving credit facility.
As a well-known credit in Europe’s leveraged loan market, LGC has been supported by mcommercial banks previously, many of which are involved in this current financing.
BNP Paribas, HSBC, KKR and Morgan Stanley were global coordinators and joint active bookrunners, while SMBC was joint bookrunner. Barclays, Credit Agricole, Mizuho, MUFG, Natixis, NatWest and Nomura were mandated lead arrangers.
A private equity consortium led by European firms Cinven and Astorg, which also includes ADIA, agreed to buy LGC from KKR late last year.