LONDON, April 4 (LPC) - Bankers are pitching recapitalisation and refinancings to sponsors in a bid to maximise leverage, lower pricing and attain aggressive documentation for portfolio companies while a window of opportunity remains as longer term visibility in Europe’s leveraged loan market starts to dwindle.
Europe’s leveraged loan market has been on fire since last year, with a host of refinancings and recapitalisation in the first half of 2017 before new buyouts started to dominate activity, gifting cash-rich investors much needed supply.
The new issue trend continued in the first quarter of 2018 with the like of a €4.7bn-equivalent leveraged loan financing backing KKR’s buyout of Unilever’s spreads business Flora Food Group that comprised a €2bn tranche — the largest single-tranche euro-denominated term loan B since the financial crisis.
There is now a window of opportunity for sponsors to launch opportunistic financings before another flurry of jumbo cross-border buyout financings hit the market between May and the summer including a €7.3bn-equivalent debt financing to back the buyout of Akzo Nobel’s chemicals business and a US$13.5bn-equivalent loan and bond financing backing US private equity firm Blackstone Group’s acquisition of a majority stake in Thomson Reuters’ Financial and Risk (F&R) unit.
Blackstone is buying a 55% stake in F&R, which includes LPC.
“If you’re going to go, then go now. That is the message we are telling sponsors,” a senior leveraged banker said.
No-one has much certainty on what the markets will be like during the remainder of the year. While the loan market has been quite resilient in the face of major geo-political uncertainty so far, there is a fear among bankers that such hot conditions can’t prevail for much longer.
“We’ve been at the top of the market for a while but are we now at the peak? The market can’t shrug off the inevitable for much longer. There have been a load of issues on the horizon and at some point they will have an impact,” the senior banker said.
Ongoing hurdles include Brexit, Trump and his stance on trade, issues over the Italian government and a rising interest rate environment.
Yet some bankers are more positive and see the loan market’s ability to shrug off volatility as a given.
“It tends to be the case that technicals trump Trump. They outweigh geopolitical events in the loan market and arguably they should as it is senior secured debt, not equity so it would need an extreme set of circumstances to undermine confidence because that is what senior secured debt is paid to do — you get 3%-4%, not equity returns,” a syndicate head said.
Many bankers and investors would welcome a correction in Europe’s leveraged loan market, which has gradually imported all the borrower friendly terms of the US leveraged loan market without the flex protection afforded to the US banks in the US markets.
This has led European banks and investors to accept increasingly aggressive terms on flexibility around restricted payments with limited deleveraging from the outset, increasing flexibility around accordion features and permissible indebtedness.
Leverage has rocketed on a number of jumbo deals and some bankers are offering opening day leveraged in excess of 7.5-8.0 times on potential sales of French drug maker Sanofi’s European generic drugs business Zentiva and German metering group Techem.
Borrowers now have the ability to add up to two turns of leverage onto a company as soon as a loan closes, without prior deleveraging.
Pricing has also compressed at the same time with 300bp being offered on Single B term loans. Meanwhile one bank is offering a second-lien on Zentiva at 675bp, a record low for second-lien since the financial crisis.
“We are at the peak of aggressiveness in Europe’s loan market and we need something to prompt a correction,” an investor said. (Editing by Christopher Mangham)