LONDON, Aug 28 (LPC) - Arranging banks are facing a fresh assault on underwriting fees on buyout loans, as private equity firms are demanding lower fees if their limited partners join deals, or for introducing other investors, after already securing discounts if their debt arms lend.
Private equity firms have been eating into banks’ underwriting fees for the last two years, by initially asking for discounts in return for providing pre-placed second-lien loans, and more recently by asking for lower fees if their debt funds join deals.
Sponsors’ growing power and financial expertise is allowing them to stretch the request to cover their LP investors and other ‘friends and family’ investors, which is hitting banks’ income in one of the few areas of lending that has remained profitable.
“Sponsors are pushing the borders, we have seen an expansion of the definition of funds that are exempt from our underwriting fees. We are very frustrated as this directly eats into the profitability of the underwriting process,” a leveraged banker said.
A handful of larger private equity firms, such as KKR and Blackstone are continuing to build their own loan underwriting capabilities, while nearly all top tier sponsors have debt arms, such as Bain, CVC and Carlyle.
Blackstone, for example, has joined as senior underwriter the first-lien loan backing the acquisition of UK defence and aerospace group Cobham by Advent, and invested in the second-lien loan along with its debt arm GSO.
Private equity firms such as Partners Group are asking for discounts on underwriting fees of up to 15%, while Advent International has asked for rebates on up to 10% and Bridgepoint has made similar requests, several sources said.
“For the past couple of years a sponsor hasn’t paid fees if their debt fund went into a deal. About five months ago, they started to request the same for their LPs and now the latest request is for ‘friends and family’ funds,” a syndicate head said.
Partners and Bridgepoint were not available to comment. Advent declined to comment.
The growing list of fee discounts threaten to reduce banks’ profits on underwriting loans backing private equity buyouts, which at around 1.75% of the financing is a key source of income for banks in an increasingly competitive market.
“It is seriously frustrating as this directly cuts into our profits,” a senior banker said.
With so much liquidity to put to work and fierce competition for mandates between banks and also direct lenders in Europe, private equity firms have been able to secure increasingly aggressive buyout loans with tight pricing, loose documentation and, more recently, lower fees.
While several lenders, including second tier banks, are agreeing to take the hit on fees and offer discounts to LPs and other funds, some larger arranging banks are refusing the request from private equity firms, despite relationship considerations.
Given this resistance from top tier lenders, it is unclear whether wider fee discounts will become market standard in Europe’s leveraged loan market.
“There is a continued pressure on loan bankers. This is very new and while we have seen sponsors ask for it we have not agreed to it on any deals. We are yet to be clear on whether it comes into the market properly,” a second syndicate head said.
The first syndicate head added: “If they are not holding their ground then banks bloody well should be, but some banks are just giving in.”
Many of the market’s more aggressive terms have been proposed by lawyers seeking to set new precedents, and push the boundaries of what is achievable in the loan market.
Lawyers initially focused on documentation, but having pushed as far as they can go, are now turning their attention to fees.
Growing resistance against aggressive loan documentation on risky assets has forced private equity firms to make concessions after investors objected. Banks may find it harder to push back on fees, due to the need to maintain good relationships with sponsors in a brutally competitive market.
“The cut to underwriting fees has been driven by lawyers with no skin in game. It presents an unacceptable risk reward for banks and is more evidence of bankers picking up pennies in front of the steam roller,” the first syndicate head said.
Not all private equity firms are viewing fee discounts as a positive move for the market, and not all are asking for reductions.
“Only certain sponsors are pushing it and it is not a great innovation,” a senior banker at a big sponsor said. (Editing by Tessa Walsh and Christopher Mangham)