LONDON May 11 The prospect of a long awaited
string of new underwrites is unlikely to alleviate the pressure
on lenders' earnings from European leveraged loans as sponsors
continue to drive down fees and pricing protection.
Bankers have experienced a real squeeze on fees since the
last quarter of 2016, competing to work on a flood of best
effort repricings and add-ons for a small flat fee and in some
cases for free, in a bid to keep people busy, earn league table
credit and position themselves well for the chunkier, more
profitable event-driven underwrites.
However, now those new underwrites are on the table, bankers
have been frustrated to find that the compression of fees has
migrated to buyout financings, as sponsors strive for best
“It is brutal out there. We are having to run faster and
jump higher to make the same amount of money as in the past,” a
head of DCM said.
Bankers have put up more resistance to an erosion of
underwriting fees and the reduction has been slower than the
cuts seen on best efforts deals. However, bankers are still
conceding to taking on more risk for a lower payout, as they
compete to win deals.
“When underwrites come, fees are not usually something
people give up easily as there are mouths to feed. It doesn’t
mean there isn’t pressure to do so but it is not the same
pressure as seen on best efforts. If you give up on this, you
might as well shut up shop,” a head of leveraged capital markets
Sponsors are asking banks to accept underwriting fees as low
as 1.25%-1.5%, a drop on the standard 1.75% payout seen for the
past 12 months or so. Before that, underwriting fees could pay
as much as 2%-2.25%.
“We were itching to underwrite something but we lost it as
the sponsor was pushing a 1.5% fee for a primary LBO and a
really risky underwrite,” a leveraged loan banker said.
Fees are the one thing left that sponsors can get banks to
compete on after documentation has weakened across the board in
Europe, with the wide acceptance of covenant-lite and other
high-yield bond style features.
The European leveraged loan market has adopted much of the
weak documentation from the US, but has not kept the same
discipline as the smaller US banking community when it comes to
“We get all the bad from the US, like weakening docs and
lower pricing and none of the upside like standard, set in stone
fees,” a head of leveraged finance said.
It is a further hit to banks, which have already seen a deep
cut in underwriting fees, having lost around 2%-3% on
underwriting and syndicating subordinated paper, such as
second-lien loans, as sponsors opt to pre-place them with
“The disintermediation of bankers on subordinated debt last
year took out a large chunk of fees on what was the more
profitable work. Now there is pressure on underwriting fees for
senior paper and banks are accepting it as they can’t compete on
docs or anything as they are all so loose as a standard now,”
the head of leveraged finance said.
In addition, to the overall cutback in fees, the portion of
fees a bank receives on any individual deal is also in decline,
as sponsors appoint a larger line up of bookrunners and MLAs to
“There are larger and larger bank groups on underwrites as
sponsors need to do favours for more and more banks after
they’ve done repricings and refinancings for practically free.
We need to be making 50% of a deal, not 17.5%-20%. Banks are
getting a smaller piece of an ever crappy pie,” the head of
leveraged finance said.
Most banks sought to win a spot on a €3.175bn jumbo buyout
financing for German drugmaker Stada. The benefits of
such a large deal are expected to be diluted once the large fee
is split between the eight or nine banks that were mandated on
As sponsors try to keep banks happy, even smaller
€400m-€500m deals are mandating four to five banks.
“Underwritings need a lot of work -- human resources,
capital markets, origination etc -- suddenly the deals are not
so compelling. If you only have €100m of a large deal, then a
1.25%-1.5% fee means you’re making maybe €1.25m-€1.5m. It is a
lot of work for not a huge amount compared to what it would have
been before a load of banks were appointed,” the head of DCM
Sponsors are also putting pressure on pricing flex, reducing
the protection that underwriting banks have when a deal goes
Sponsors are now asking banks to agree to around 100bp of
flex, compared to around 125bp earlier this year and 150bp last
year. One senior banker said a sponsor was pushing the bank to
accept flex as low as 75bp.
Europe’s leveraged loan market is extremely hot, with far
more demand than supply. However, there has been some pushback
from investors to very aggressive terms and banks will be wary
of agreeing to more restrictive flex provisions.
“Flex isn’t a problem when everything is flying out of the
door but it only takes one deal to go wrong,” a capital markets
With so much money to put to work in a low yield
environment, banks are having to stay competitive. While some
banks may be able to hold out on some deals and say no to
tighter fees and reduced flex, many will be willing to do them.
“It’s getting harder and more and more deals make less
economic sense but ultimately, you don’t get paid for not doing
deals,” a second capital markets head said.
(Editing by Christopher Mangham)