LONDON, July 2 (LPC) - A €10.3bn loan and bond financing backing the buyout of ThyssenKrupp Elevator raised over €20bn in investor orders, enabling arrangers to optimise the capital structure, tighten pricing and stay within the flex to make full fees, allaying any fears over selling such a large deal during the Covid-19 pandemic.
Advent, Cinven and Germany’s RAG Foundation agreed a €17.2bn acquisition of Thyssenkrupp’s elevators division in February, underwritten with a debt financing put together before Covid-19 disrupted the markets.
The jumbo deal was launched with caution in June but wrapped up ahead of deadline on June 30 after a successful syndication process and has since traded well on the secondary markets, delighting arrangers and investors.
“There was something for everyone in this deal -- loans and bonds, secured, unsecured, euros and dollars. They raised a massive amount and it traded up nicely, which suggests the world is alive and well for now,” a senior investor said.
During syndication, the loan portion of the financing was adjusted to take account of strong investor demand. A euro TLB increased to €1.015bn from €1bn at launch, while a dollar TLB rose to €2.55bn-equivalent, from €2.05bn. A €500m-equivalent, dollar-denominated term loan A that was put into the capital structure as a safety net and could have seen arranging banks left holding the paper was removed, following the strong investor demand.
While margins remained the same at 425bp over Euribor/Libor, the loans priced at 98 OID, after launching at 96-97 guidance.
The company tightened pricing on all tranches of its bonds prior to close. Pricing on a €1.1bn 7NC3 senior secured was 4.375%, previously 4.5%-4.75% and a €500m seven-year non-call one senior secured floating-rate note priced at 475bp over Euribor at 99.5 OID. A €650m eight-year non-call three senior priced at 6.625%, from 6.75%-7%, after whispers of 7%-8%.
ThyssenKrupp also landed two US dollar tranches: a €1.5bn-equivalent 7NC3 senior secured at 5.25%, from 5.5% and a €401m-equivalent 8NC3 senior at 7.625%, from 7.75%-8%.
The financing had been underwritten before the health crisis and given its size was setting itself up as a benchmark deal. Therefore, the documentation was one of the most aggressive seen in the leveraged market to date.
The financing closed but only after the borrower conceded to investor demands and made some investor-friendly changes to its documentation.
“TKE took an amalgamation of all precedents and created a doc riddled with holes that afforded no protections whatsoever. [With the changes] It still has reasonably aggressive docs but it has reined in many of the excesses and shown that the investors won’t just roll over,” a syndicate head said.
Some of the changes on the loan include the removal of a margin step down. The ticking fees also tightened, so the holiday is now 45 days as opposed to 120 days and it will pay 50% of the margin for 46-90 days, as opposed to between 121-180 days. The MFN is now 12 months versus six months.
There is a 25% cap on Ebitda adjustments, whereas before there was no cap.
The freebie basket is down from 100% to 75%, so whereas before you could raise 1.0 turn of leverage as additional debt, now it can only be three-quarters of a turn.
Ratio-based and additional debt incurrence baskets, which is the ability to relever, were all tightened.
Restricted payments, so the ability to take out a dividend, were tightened. There was also a tightening around the disposal of proceeds, so when an asset is sold a company has to repay debt with certain exemptions and those exemptions were reduced.
There was a loosening around transferability too. The borrower had a clause in saying no lender could hold more than 10% of the capital structure to prevent any one lender being too influential, however, that was removed, which will create more liquidity for investors.
The changes to documentation will become the new benchmark for other deals to follow in a post-Covid world, but the deal is still viewed as aggressive.
“There were some concessions but everything is relative, it is still a pretty aggressive doc,” a second syndicate head said.
The senior investor added: “Even with the changes the docs are still stacked heavily in favour of issuers and I don’t think it will ever move away from that situation. The toothpaste is out of the tube and it’s not going back in. There are so many baskets, carve outs and exemptions on TKE that it is ridiculous. From day one they can raise more debt so there are no real controls on this, tightened or not.”
One of the fears around loose documentation is that any incurrence of additional debt could result in a ratings downgrade, irrespective of whether the credit has performed well.
Yet, while a lot of emphasis is placed on documentation, it is a secondary consideration as investors focus on a credit and its cashflows, predictability and defensibility.
Given its size, TKE was very hard for investors to say no to, needing to have it in their portfolio to show relevance and diversity.
“Very few people let docs influence appetite as they all needed the asset. Ultimately you don’t want to have to worry about the docs too much. You shouldn’t have to rely on enforcement as you would like to believe credit analysts’ work is so good there is nothing to worry about. TKE has sufficient size and scale that people weren’t too worried, but it wasn’t a no brainer,” the senior investor said.
The financing also included €2bn of unfunded facilities, comprising a €1bn 6.5-year revolving credit facility, paying 300bp over Euribor/Libor and a €1bn, 6.5-year guarantee facility, paying 2.75%. There is also a €2bn PIK that was placed with a number of direct lenders including GS MBD around a week after the deal was agreed. (Editing by Christopher Mangham)