LONDON (LPC) - A surge in supply in Europe’s leveraged loan market is giving investors ammunition to push back against aggressive pricing and documentation and win concessions from private equity firms and arranging banks as pricing moves higher.
A series of deals have been flexed higher in recent weeks, including a €2.34bn term loan B for German metering business Techem. Pricing on the deal was flexed up to 375bp over Euribor from initial guidance of 350bp last Wednesday and several changes were made to documentation.
A combination of increased deal flow, coupled with poor secondary trading levels on large aggressively priced and structured loans that were syndicated earlier this year, is giving investors the power to drive a harder bargain on aggressively structured deals.
“Don’t give me documents that would have flown three months ago, we all know where the market is now,” a senior investor said.
European primary pricing has risen in the last month and single B credits that were pricing at 300-325bp are now pricing at 350bp to 400bp. Most companies are paying 350-375bp, with better deals pricing tighter and weaker deals pricing wider, sources said.
Activity in the market has increased in recent months, with US$12.8bn of deals launching in May and US$14.4bn launching in June, up from US$7.7bn in April, according to ThomsonReuters LPC data, however the type of deals coming to the market has changed substantially from the repricings and refinancings that characterised 2017.
The market has seen far more large new money loans this year as units are spun out of big corporations, including Unilever’s sale of its spreads business Flora Food Group. These businesses are sizeable and lack a market track record, which makes them more challenging for investors to analyse.
Poor secondary trading levels on these big buyouts, however, is proving to be another deterrent for investors and is continuing to push primary pricing higher. Flora’s £700m sterling term loan B was quoted at 97.6 last Friday and its €2bn term loan B was at 97.52.
Nearly a third of private equity backed buyout loans completed so far this year are trading between 99 and 97% of face value, with 22.8% of the loans at 98-99 and 8% at 97-98, LPC data shows.
Many big institutional investors are now telling private equity firms that they are unwilling to look at transactions until they have made changes to aggressive documentation that some law firms have tried to establish as legal precedent.
“It’s all wearing a bit thin. If the documentation is ludicrous, we’ll say go and rewrite it and we’ll look at it after that. I can’t be bothered to list the changes,” the senior investor said.
Private equity firms are having to take a more pragmatic approach and make the changes that investors require upfront to get their deals fully subscribed as liquidity grows scarcer and investors take a tougher line as deals continue to launch before the summer break.
“We’re saying fine, if you don’t change it, we won’t do your deal. If you do, we’ll do €50m,” a second investor said.
The changes in the market are raising the question of how to get best execution and result as investors get pickier. The days of ‘discovery’, where aggressive deals are launched into an overheated market to see if they will fly, may be over for now.
“It is a better tactic to come out with a less aggressive deal, rather than a very sharp deal that has to be recut three times,” a third investor said.
While excess supply is currently aiding that argument, any reversal of that dynamic could weaken the current investor-friendly environment and give private equity firms the upper hand again, bankers and investors said.
Editing by Christopher Mangham