December 6, 2018 / 5:08 PM / 9 days ago

Brexit withdrawal symptoms cut into sterling loan demand

LONDON, Dec 6 (LPC) - UK cinema chain Vue scrapped a £833m-equivalent loans last Thursday as Brexit jitters impacted the European leveraged finance market just days before lawmakers are set to vote on Theresa May’s Brexit deal.

Vue cited “unattractive market conditions” for withdrawing the deal, which comprised a £300m term loan B, a €480m term loan B and a €114m delayed-drawn facility.

It is the third loan deal to be pulled from the European leveraged loan market this year following trust and custodial services provider Vistra’s withdrawal of a €196m debt funded dividend recap loan last month and a €622m dividend recap and refinancing loan by Norwegian satellite navigation group Marlink in July.

Vue’s deal is the first event-driven leveraged loan to be withdrawn from the European market this year. Proceeds of the £833m-equivalent loan were intended to finance the buyout of German peer CineStar and revamp the company’s capital structure.

The acquisition financing, which backs its takeover of Germany-based CineStar, is fully underwritten and a spokeswoman for the company said no new equity is required from the sponsor OMERS Private Equity.

Vue’s existing debt capital structure remains in place, which comprises a £120m TLB due to mature in 2023 and a £60m revolving credit facility. A further £300m in senior secured notes and €360m senior secured floating rate notes remain outstanding until July 2020.

While many issuers have seen pushback on leveraged loans in the last month, a trend that echoes choppiness in the summer, some investors expressed concerns about the overall business plan.

“Leverage is aggressive in the context of synergies to be realised and the film slate does not look so good for next year,” said one investor. STERLING JOB Vue’s withdrawal comes at a time more investors are becoming more cautious around sterling transactions, especially as the Brexit uncertainty may continue into the new year.

UK lawmakers are set to vote on Theresa May’s proposed Withdrawal Agreement on Tuesday, with many fearing that if it is voted down a ‘no deal’ Brexit looms ahead of the deadline in March.

The Loan Market Association has been vocal in seeking to minimise disruption across the market by calling for a transitional arrangement covering passporting rights for UK lenders and the enforceability of English law in the case of a hard Brexit.

The Bank of England recently warned that a no deal Brexit could shrink the country’s economy by 8%, triggering a worse recession than the financial crisis.

The BoE has expressed concerns about the recovery rates of loans as covenant-lite is widespread in the leverage loan market.

“Investors are reluctant to look into sterling deals at the moment,” said one banker.

“They say I don’t want to do it and to come back next year when there is more certainty.”

As the prospect of a hard Brexit looms investors are becoming more wary about holding sterling loans and bankers discouraged as deals struggle to clear the market ahead of the Christmas break.

“I am massively selective about underwriting UK deals,” said a second banker. “Premiums for upcoming sterling deals need to be at least 100bp over euro tranches.” SHALLOW WATERS All eyes are on UK wealth management services provider Tilney Group’s refinancing package as one of the few leverage deals left to syndicate this year.

Commitments are due Friday on the deal that comprises a €335m TLB, a €65m pre-placed term loan A and a €25m pre-placed revolving credit facility.

The loan launched at 475bp-500bp over Libor with a 0% floor and a 99.5 OID with 101 soft call protection for six months.

Despite fears it may not clear the market, Tilney can look to UK private school operator Cognita, which allocated a £200m TLB this month at 500bp over Libor as evidence of continued demand.

Cognita’s syndication was not the smoothest with a £255.3m senior unsecured notes pulled from the market and both the sterling and euro loans flexed up 25bp during syndication.

Buyer Jacobs Holding was required to increase the amount of equity into the deal to £1.5bn.

Still, higher pricing might not be able to ease investors’ concerns about the liquidity available in the secondary market for sterling loans, especially as there has been a softening in demand for leveraged loan paper in November.

“There is limited liquidity in secondary market for sterling loans,” said a third banker.

“That means investors who are buying in now are expected to hold the loans for a while no matter how uncertain Brexit is going to be.” (Editing by Christopher Mangham)

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