June 5, 2019 / 3:12 PM / 3 months ago

Banks face losses on Evonik' methacrylates unit buyout loan

LONDON, June 5 (LPC) - A €1.785bn leverage loan backing private equity firm Advent’s €3bn acquisition of German chemicals group Evonik’s methacrylates plastics unit, Madrid has been offered at a steep discount implying a potential loss for underwriting banks, banking sources said.

Both the euro and dollar denominated term loans will price at 500bp over Libor, the wide end of the 475bp-500bp range set last month and will come at a 95-96 OID, from an original launch guidance of 99 OID.

Soft-call protection of 101 has also been extended to 12 months from six months, alongside a number of other document changes.

Flex arrangements between banks and sponsors vary on a deal-to-deal basis and some riskier-perceived deals can come with generous flex terms. On Evonik, banks have got very close to the flex terms and losses are implied, according to several banking sources.

Advent was not immediately available to comment.

Banks have struggled to hit budget this year amid low deal flow that reached a 10-year low, according to LPC data.

Event-driven underwrites are one of the few profitable trades left in the market, however, they are highly competitive as banks agree to extremely tight terms that can backfire in the event a deal struggles.

While the financing was hotly anticipated by cash-rich leveraged loan investors eager to put money to work, it has been met with some caution as Evonik is seen as a cyclical business.

“Evonik has very large market share and is best in class in what it does. It generates a lot of cash flow and leverage is modest. But there is expected to be a cyclical decline in the next year or two, everyone knows that, so there is a bit of nervousness around loan liquidity and the levels it could drop to on the secondary market,” a senior banker said.

A second senior banker added: “Evonik is one of the more complicated commodities-exposed borrowers and is exposed to cyclical downturns.”

The financing comprises a €965m seven-year term loan B, a €520m-equivalent US dollar seven-year loan and a €300m, 6.5-year revolving credit facility.

Barclays is lead left on the dollar tranche, while Deutsche Bank and Goldman Sachs are bookrunners. Bank of America Merrill Lynch, Bank of China, Helaba, HSBC, RBC and NatWest Markets are mandated lead arrangers.

Investors have been asked to recommit to the revised financing by June 10, from an initial deadline of June 4.

Evonik agreed to sell its clear acrylic sheet unit to Advent International for €3bn in March. (Additional reporting by Aaron Weinman in New York; Editing by Christopher Mangham)

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