LONDON, April 24 (LPC) - Banks that underwrote large European leveraged loans prior to the market closing last month have rebuffed offers from direct lenders to buy portions of the financings and alleviate bank risk, preferring to hold the paper as the private money is too expensive.
A number of banks are holding around ten buyout financings totalling in excess of €10bn, which they are unable to sell after Covid-19 banished any hopes of lenders being able to launch syndication processes. Europe’s leveraged loan market all but shut for new issuance in mid-March once the pandemic took its toll.
The outstanding buyout financings cover a wide range of sectors including Cerelia, a French company that makes pizza dough and cookies; UK-based music-mixing console provider Audiotonix; German pharmaceutical supplier PharmaZell; Thyssenkrupp’s elevators division; French mortgage broker Financiere CEP; UK’s Stonegate Pub; and BASF’s construction chemicals business.
Even financings that were in the process of syndication were postponed in March, including a €1.61bn acquisition loan for Dutch equipment rental firm Boels and a €274.7m acquisition loan for French laboratory services group Biogroup LCD, leaving banks holding that debt too.
With no imminent exit route, direct lenders approached banks to take chunks of these financings and deploy large cash reserves into new opportunities. Direct lenders don’t typically get a look in on term loan B syndications as the return expectations are too high, unless banks are unable to shift paper for borrowers that are perceived as being riskier.
Securing paper in many of these outstanding deals would be quite lucrative for the direct lenders as the companies are viewed a strong performers, notwithstanding adverse effects from Covid-19. Many of the companies should be back in good health once the pandemic is over, several bankers said.
While banks typically try to sell any underwritten deal within a three month period, they are holding onto the paper for now in the hope they will be able to launch syndication processes down the line to mainstream investors.
“Direct lenders are sniffing around like optimistic hyenas trying to get a bit of meat. The herd of underwritten loans don’t contain the sick or old and therefore won’t be isolated and left prey to them,” a syndicate head said.
As many of the outstanding loans were underwritten before Covid-19, they contain quite competitive terms from the banks, both economically and from a documentation standpoint.
Direct lenders charge a premium to CLOs and credit funds and are likely to want a price which is outside of a bank’s flex protection, in excess of 6%-6.5% at 97 OID. If a bank sells outside flex protection, it loses money.
“Direct lenders are asking if they can be ‘helpful’ but ‘helpful’ is at best a euphemism because they want an enormous discount. Banks underwrote the deals as they were viewed as good credits so they don’t want to engage as it’s not the right time to sell as its too expensive and through the flex. Banks are saying no as they are not forced sellers,” the syndicate head said.
While Europe’s leveraged loan market is still shut to primary issuance, there are positive signs that denote the market could open for business in the coming weeks for the right credit.
Swedish alarm company Verisure opened the European leveraged market after a hiatus of almost two months. The successful €200m issue of senior secured floating rate notes for a Single B borrower, at 500bp over Euribor at 99.5 OID, tested investor appetite for junk debt and tentatively paved the way for the revival of the leveraged loan market. “There is a belief the market will come back and credits will survive this crisis, so no one is sitting there thinking they need to sell now,” the syndicate head said.
While banks are shunning direct lenders for now, the goodwill extended to leveraged finance desks from banks’ credit committees will not be indefinite.
If the market hiatus continues for too much longer, there will come a point when banks will need to derisk from situations, even if that means taking a hit.
“Everyone is sort of sympathetic right now, there is a sense that we are all in this together as no one saw this coming and it is unprecedented. There is a little space and goodwill to get through the shutdown period and people are flexible and willing to do that. Three months later, if there are still issues, people will be less lenient,” a second syndicate head said. (Editing by Christopher Mangham)