June 11, 2020 / 12:59 PM / 21 days ago

Coty assembles record club loan after banks deny underwrite

LONDON, June 11 (LPC) - KKR’s acquisition of a majority stake in US-based cosmetics maker Coty’s hair and nail care business is being backed with a US$1.3bn club loan, the largest in Europe’s leveraged debt market since the financial crisis, after banks were unwilling to underwrite a financing amid the coronavirus pandemic.

KKR agreed to acquire a 60% stake in Coty’s Professional Beauty and Retail Hair Businesses, including the Wella, Clairol, OPI and ghd brands — known collectively as Wella — in early May, valuing the company at US$4.3bn.

Buyouts are typically backed with underwritten financings that are subsequently syndicated to investors, however banks had lower risk appetite due to Covid-19 and were unable to provide an underwrite for Coty.

KKR opted to raise a club loan, which is set to close in June, securing around 10 banks and a handful of investors to commit US$1.3bn, where the exposure will be held on balance sheet.

“There wasn’t an underwriting market so [the borrower] had to find more creative ways to finance the transaction. There is nothing that is normal about the market we are in and what is unique is raising US$1.3bn on a club basis, it is a highly impressive achievement. Bank club financings (in the leveraged market) are normally US$200m-$300m,” a senior banker said.

The financing comprises US$1bn of funded debt via a five-year term loan A and a six-year term loan B, as well as a US$300m revolving credit facility. The loans will be denominated in dollars, euros and sterling.

Both banks and investors will take the TLA and TLB. The TLB will price with a five handle and will be leveraged around 3.5 times the company’s approximate US$350m Ebitda.

The financing will have a leveraged covenant and will be offered with 101 soft-call for 12 months, meaning it won’t be refinanced or repriced during that period.

CLOSE RELATIONS

KKR drew on its relationships with banks and funds to put in place such a big club financing.

While some other borrowers might try to do something similar, it is unlikely to become a trend and could be reserved solely for top tier sponsors.

“It is a relationship-based transaction. People need to like the credit and KKR otherwise they won’t be doing it. The fact the deal is done is testament that banks have been super supportive,” the senior banker said.

The financing was put together towards the end of April when banks were still averse to underwriting risk.

Since then, a trio of banks — Morgan Stanley, Barclays and BNP Paribas — agreed to underwrite €3.5bn of debt to back a takeover bid for Spanish telecoms company MasMovil. Emerging on June 1, MasMovil was the first underwrite in Europe’s leveraged loan market since the pandemic put Europe in lockdown. It is also a KKR deal.

While the market is now open to some underwrites, MasMovil is a very different credit to Wella, as it is rated and has an existing loan borrower base.

“MasMovil came four weeks after Coty. MasMovil is rated and has existing debt outstanding – it is a different set of circumstances. However, the market is developing rapidly,” the senior banker said. (Editing by Christopher Mangham)

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