October 15, 2019 / 5:13 PM / a month ago

Merlin loan pushes new boundaries

LONDON, Oct 15 (LPC) - Investors are criticising documentation on a £2.193bn-equivalent loan backing the buyout of UK theme park and attraction operator Merlin Entertainments for including some of the most aggressive terms seen in the market to date.

However, underwriting banks are managing any potential resistance to the terms, especially around debt incurrence, by targetting smaller investors that don’t have the same resources as the bigger funds to scrutinise the documentation, banking sources said.

And with so many smaller funds investing in the deal, the larger ones are likely to have a diminished influence in arguing against the terms, a senior investor said.

“It shows for such a big deal to get done you don’t need all the big investors,” a capital markets head said.

Merlin’s loan documentation has been described as tougher than on a US$13.5bn financing backing the buyout of Refinitiv by a Blackstone-led consortium, which up until now had been seen as the most aggressive, sources said.

“The Merlin docs are very loose by current market standards. Merlin is seen as the latest benchmark on aggressive docs, especially in terms of debt incurrence. There are baskets you would usually see on deals but they are a lot wider than you would expect,” a second senior investor said.

On Merlin’s deal there is a basket that allows the company to incur debt in an amount equal to two times the available restricted payments capacity. In other words, to incur twice as much debt as you could take out as a dividend. Typically it is one times.

Elsewhere, they are asking not to include drawings from a £400m, 6.5-year multicurrency revolving credit facility when calculating leverage.

As a strong, stable company, Merlin has been able to push the boundaries on terms. Its buyers, a core fund owned by Blackstone, Kirkbi and Canadian pension fund CPPIB, also give credence to its aggressive terms.

“Restricted payments are very loose around some baskets, which are not insignificant. The exclusion of RCF drawings from leverage calculations can make a meaningful difference, which is especially a worry because the RCF is so big. It is the usual stuff but it is pushing it to the limit. It is not a huge surprise given the quality of the credit and the buyers,” the second investor said.

A capital markets head added: “There is no term in itself that hasn’t gone through the market before but when taken in aggregate it makes the docs as a whole exceptionally loose and you would question whether any sensible sponsor would ever use all of the capacity if it wanted to do a deal again.”

Blackstone was not immediately available to comment.

TRANSFERS

In an unusual move, the borrower is attempting to impose aggressive transfer restrictions that will make the minimum amount anyone can trade €5m, compared to the usual €1m-€2m. There will also a be a minimum hold level of €10m of the loan. Minimum hold levels are extremely rare, sources said.

Criteria around minimum holds could have been imposed to enable a more manageable syndicate, in a bid to prevent a lot of smaller lenders trading tiny positions.

“It will be interesting to see if minimum holds and larger transfer thresholds work. It is a cross border deal and the US doesn’t like language around terms that limit liquidity, and rightly so,” the capital markets head said.

STEP UP

Docs backing leveraged buyouts have been getting more aggressive over the past few years but have stepped up a notch over the last 24 months, fuelled by a supply/demand imbalance.

Lawyers have pushed boundaries on each jumbo buyout loan. Despite pushback from investors that has led to some revisions to opening documentation, much of the terms have filtered through. Terms have then been recycled into smaller deals until they have become market standard.

Merlin’s financing comprises a £1.252bn-equivalent euro-denominated term loan that is guided at 300bp-325bp over Euribor and a £941m-equivalent dollar-denominated term loan, which is guided to pay 325bp-350bp over Libor. Both seven-year term loans are offered with a 0% floor at 99.5 OID.

There is 101 soft call protection for six months.

Expected ratings are B1/B+. Investors have been asked to commit to the loan by Wednesday.

The deal also includes a US$172.5m delayed draw term loan facility.

Bank of America Merrill Lynch and Deutsche Bank are physical bookrunners for the euro tranche, while Bank of America Merrill Lynch is US tranche physical bookrunner. Barclays, HSBC, Mizuho, UniCredit and SMBC are passive joint bookrunners, while Bank of China and Santander are mandated lead arrangers.

Merlin was on the road last week with £635m of fixed-rate dollar and euro 8NC3 senior notes that also back its leveraged buyout. (Editing by Christopher Mangham)

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