June 12, 2020 / 12:11 PM / 22 days ago

Banks prep launch of €10bn debt backing Thyssenkrupp unit buy

LONDON, June 12 (LPC) - Banks are preparing to launch a highly-anticipated €10bn dual-currency loan and bond financing to back a buyout of Thyssenkrupp’s elevators division, pre-sounding investor appetite to optimise the structure and play the markets off each other to achieve best execution.

Advent, Cinven and Germany’s RAG Foundation agreed a €17.2bn acquisition of Thyssenkrupp’s elevators division in February, underwritten with a debt financing put together before Covid-19 disrupted markets and put sell downs and new issuance on hold.

The plan was to always syndicate towards the end of June and arranging banks, led by Goldman Sachs and including Deutsche Bank, Barclays, Credit Suisse, RBC and UBS, are on track to do that.

Given its size, it has been much anticipated and is the benchmark deal the debt markets have been waiting for.

Had it launched in March or April the underwriters would have lost money as the underwritten terms are pre-coronavirus and the market widened significantly during that period.

The markets are now recovering and the lead banks are now focused on minimising any losses and making fees, placing a huge emphasis on getting the sell down strategy correct.

“They will be asking people what they think they can do and at what price. The secondary loan market is up, the iTraxx is in, the US high-yield market is going gangbusters, the European loan market has proved constructive and the European high-yield market is open. All these things are positive indicators for receptivity,” a senior banker said.

SLICE AND DICE

A number of investors are being pre-sounded on the financing, with materials set to go out shortly on the company, performance and the proposed capital structure. Syndication is due to launch at the end of June when the offering memorandums are ready.

The funded part of the financing totals €8.25bn, comprising €6.55bn of senior leveraged loans and senior secured notes and €1.7bn of senior unsecured notes.

The split between the secured and unsecured is set but within the secured part of the capital structure there could be a lot of movement working out how much should be loans, the split between term loan A or term loan B, the amount of bonds and the currency split between euros and dollars.

“It is a big deal and a big chunk of the market has to play it. Will there be an A and B on the term loans? Will the loan get downsized and the bond upsized? Do you play euros and dollars off each other to slice and dice it? It is about optimising the structure and comes down to pricing in the context of how much there is to sell and liquidity,” a second senior banker said.

The financing also comprises unfunded loans. The original commitment totalled an €800m revolving credit facility and some €1.2bn of guarantee facilities that could prove expensive for the arranging banks depending on the fees they have to pay to bring in additional banks. However, the size of the unfunded facilities could be subject to change.

The sponsors are also expected to have placed around €1.5bn of PIK that ranks behind the senior unsecured notes.

SIZE MATTERS

A number of investors have been apprehensive about taking on risk as result of Covid-19. However, given the size of the financing, Thyssenkrupp’s elevators division is a benchmark deal that most investors will need to play to prove their portfolio is diverse and representative of the market.

The business is also seen as a strong credit that has proved resilient during the pandemic, which should make it easier to invest in. Some 70%-75% of its business comes from servicing elevators and many of those contracts have been upheld even if buildings were closed or not at maximum capacity. The Asian market is also opening up for new builds again.

“There could be a lot more pain if it was a marginal credit. It is a great credit,” the second banker said.

Although a few M&A situations are starting to emerge, there is unlikely to be a flood of new deals this year, especially if a feared second wave of the pandemic arrives in the autumn. That could also swing in TKE’s favour as investors look to put money to work in new deals.

“TKE is a benchmark deal and the sort of deal that accounts need to own on top of which is it Covid resilient and an excellent credit. There are not many opportunities to do high quality new deals for the foreseeable next couple of quarters. This is new money, not a refinancing or a rescue issue so it is a chance to put money to work and get a good return that just isn’t available in the secondary market,” the first senior banker said.

Cinven declined to comment. Advent and RAG were not immediately available to comment. (Editing by Christopher Mangham)

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