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LONDON, July 6 (Reuters) - Risk is being priced into Europe’s leveraged loan market for the first time this year after a pickup in deal flow is leading investors to begin cherry picking the best deals, leaving the less popular ones to struggle over the finishing line.
After a splurge of repricings and refinancings since September 2016, Europe’s leveraged loan market is finally digesting meaningful new supply. As investors struggle to deploy manpower on every deal, they are instead opting to focus attention on a preferred few.
The market is experiencing pricing differentiation of around 150bp between the stronger credits that are reverse flexing to 325bp prior to close, and the less favoured loans, which are flexing wider to 475bp and adjusting documents to make them more borrower friendly.
Any pricing differentiation is exacerbated further once OIDs are added into the equation.
“There is huge pricing differentiation right now. The more complicated deals are looking at the 450bp-500bp area, 75% fall into the mainstream category of 350bp-400bp and the best will be pushing pricing of 325bp,” a leveraged finance head said.
Among the deals that were forced to sweeten terms was the €277m term loan backing Ardian’s acquisition of a 60% stake in Assystem Technologies. Pricing was widened on July 4 to 475bp over Euribor with a 98.5 OID, from launch guidance of 400bp with a 99.5 OID. Banks also offered 101 soft call protection for six months and ticking fees that kick in after 60 days, rather than 90 days, to make the deal more attractive to investors.
Meanwhile, at the end of June a €1bn term loan backing the buyout of Hong Kong-based international schools operator Nord Anglia tightened to 325bp over Euribor with a 99.75 OID, from initial guidance of 375bp-400bp with a 99.5 OID.
But increasing market sophistication means it isn’t just the small deals that are doing badly and the large liquid deals that are going well.
“It used to be that bigger is better, that’s not wholly the case anymore,” a syndicate head said.
Investors are looking for diversification and some of the smaller deals have been very successful, including a €330m term loan for French elderly care services company Colisee that allocated on July 4 at 325bp over Euribor, at par from a launch price of 375bp.
At the end of June a €245m term loan backing the buyout of Dutch chemical distributor Caldic tightened to pay 325bp over Euribor at par from initial guidance of 350bp-375bp with a 99.5 OID.
Given the size of some of the smaller deals, it was easy to get them oversubscribed and therefore rein pricing in, a syndicate head said.
Meanwhile, deals that made concessions and flexed higher in syndication included a €765m term loan backing the merger of European industrial supplies distributor IPH and its peer Brammer and a €1.5bn-equivalent loan refinancing for German packaging company Kloeckner Pentaplast.
Despite some deals struggling, all seem to have a price point at which they will sell, enabling banks and borrowers to avoid any fallout from hung deals.
”The key thing is that there is no overhang being created where banks are sitting on positions as that would cause market dislocation. The buyside know banks have flex and they want their fair share. On the more complicated deals investors are saying pay up and they can afford to say that as they can afford to miss a few deals as there is no pressure to do everything seeing as there is so much in the market,” the leveraged finance head said.
Healthy levels of deal flow are likely to continue in the short term at least with a number of situations on the horizon including an £800m term loan for UK-headquartered health food and supplements chain Holland & Barrett; a €3.175bn financing backing a potential buyout of German generic drugmaker Stada ; as well as auctions processes for credits that could come to the leveraged loan market including €1.5bn of loans for German ceramics company CeramTec.
Given this state of play, bankers are likely to be more mindful when structuring and pricing this next batch of deals, in order to factor in market risk and credit quality.
How long pricing differentiation lasts remains to be seen as the level of supply, while a welcomed improvement from earlier this year, is still not enough to soak up the full demand out there. This has been seen most explicitly in the secondary market, where prices on the whole are holding up and very little new paper is trading hands after allocations.
A large financing like Stada that includes a €1.95bn term loan could go some way to easing the pressure of the supply/demand imbalance.
“The market is being constructive and operating how it should in that there is differentiation and that is good, as when structuring, bankers will be mindful that there is no longer a common assumption that the market is good and will always remain so, which should introduce a note of caution. All of which is optimistic, as come the autumn everyone will be reckless again as nobody learns anything. If Stada comes there will be some recalibration as it is such a big deal,” the syndicate head said.
Editing by Christopher Mangham