LONDON, July 11 (LPC) - Up to €25bn-equivalent of deals are poised to hit Europe’s leveraged loan market this summer, but underwriting deals is proving difficult as arranging banks try to strike a balance between caution in a weaker market, and aggression to win deals.
The recent surge in deal supply of leveraged and public-to-private buyouts has been welcomed by lenders and investors after low volume in the first half of the year, but is giving arranging banks’ a headache.
“It is a tough market. Everything is hard as we have to take a view on it,” a head of acquisition finance said.
Deals awaiting syndication include a £1.387bn-equivalent financing for car auctioneer BCA Marketplace, £3.8bn-equivalent of loans for UK theme park and attraction operator Merlin Entertainments and US$3bn-equivalent of debt financing to back Bain Capital’s potential acquisition of WPP’s data analytics division Kantar.
The pipeline is also building for the second half of 2019 as as weaker equity markets produce more public-to-private buyouts, and auctions including Bayer’s animal health division and Irish building materials group CRH’s European distribution arm continue.
“As an arranger it remains very aggressive to win a deal but it is a skittish market which makes it difficult because you don’t get paid for not doing deals,” a syndicate head said.
Banks are battling to win business in the second half and claw back budgetary losses after a slow first half, but are mindful that aggressive underwrites will have to stand the test of time and another possible market wobble.
“Spin-offs and P2Ps have longer gestation periods, which is hard in a market when a downturn could come at any point. Risk needs to be priced into everything but financings still need to remain competitive as there are so many banks out there,” the head of acquisition finance said.
Despite strong appetite for event driven financings, investors are being far more selective and a clear distinction is emerging between strong credits and more complex assets.
Investors are taking a tougher line, particularly on cyclical businesses, and are demanding changes to documentation, pricing and even structure. This pushed some banks beyond their flex terms and into losses several times in the second quarter.
“Investors are worried where we are in the cycle and they are not afraid to push back,” the syndicate head said.
Sectors such as retail or those linked to discretionary consumer spending, including construction, automotives and chemicals, are under threat, bankers said.
“What is worrying is lenders structuring deals as if there isn’t a downturn on the horizon, particularly if you are underwriting a cyclical deal with 5.0-6.0 times leverage, which then jumps to 10 times if things go wrong,” the syndicate head said.
Arranging banks are now taking a more proactive approach and are turning down underwriting opportunities if they feel deals are too risky, in stark contrast to 18 months ago, when almost every bank was competing for every deal.
“It’s a question of being wise as to which deals you back. There was a time when every lender would try to do every deal but now they are prepared to say no,” the syndicate head said.
July is expected to be a busy month in Europe’s leveraged loan market as banks make a concerted push to derisk by selling down any deals on the books before the summer slowdown in August.
The market will need to digest around 20 deals totalling around €25bn-equivalent of cross-border and euro-only transactions in the next few weeks, according to LPC data.
Some investors are choosing not to buy paper in primary syndication in the hope of picking up the paper at a bigger discount in the secondary market, but lenders are warning against this due to a recent lack of depth in the secondary market.
“There appears to be a misconception that loans are akin to liquid equity, which they are not. People think they’ll pick up paper in secondary when it trades off but you can’t do that because as soon as you buy €20m of a loan you send it to par,” the syndicate head said.
“A bunch of investors think they are secondary market gurus, when actually they should really be focusing on credit conviction and buying loans that don’t go wrong.”
Editing by Tessa Walsh