LONDON, Aug 8 (LPC) - Three equity investors behind the £5.91bn (US$7.49bn) take-private buyout of UK theme park and attraction operator Merlin Entertainments are also underwriting just under half of the £3.8bn-equivalent debt, uniting the interests of parties that have traditionally been separate.
Blackstone, Lego’s founding family KIRKBI Invest and Canada’s CPPIB Credit Investments have underwritten £1.66bn-equivalent of debt, or 43.7% of the total debt financing and fee pool, in addition to their equity commitments.
Equity investors underwriting senior debt is unusual and highlights banks’ competition with alternative capital providers for a limited fee pool. It also raises concerns about potential conflicts of interest if companies run into trouble.
“It is unusual. You don’t often have people in the equity and the senior debt,” a loan syndicate head said.
“Equity investors taking 43% of the debt or almost half the fees, should be unacceptable but banks are caving in and they are either missing the point or don’t have the strength to say no,” he added.
The deal was originally underwritten by Bank of America Merrill Lynch and Deutsche Bank, which originally provided £1.9bn-equivalent each.
The £1.66bn commitment from the three equity providers far outweighs £78m-equivalent commitments each from Barclays, HSBC, Mizuho and UniCredit, which reduced BAML and Deutsche Bank’s commitments to £947.4m-equivalent each.
Blackstone is intending to syndicate its £680m-equivalent underwriting, which is its largest to date, along with its commitment to the buyout of Refinitiv.
The private equity firm bought Refinitiv from Thomson Reuters for US$20bn in 2018 and sold it to the London Stock Exchange for US$27bn in July 2019. Refinitiv is the parent company of LPC and IFR.
Blackstone has been underwriting loans since 2013, primarily on deals that the firm has an interest in. Some of the Merlin debt may be sold to GSO, Blackstone’s credit arm.
Other top private equity firms, including KKR, also arrange and syndicate loans.
KIRKBI is intending to hold its £774m-equivalent commitment to the senior facilities and interim facilities, which amounts to 20% of the loans and bond financing, and CPPIB could also hold its £210m-equivalent.
While equity investors have provided subordinated debt to portfolio companies, only a handful can provide senior debt and undrawn revolving credits, particularly in size, sources said.
Some banks view the move positively, as underwriting senior debt aligns equity investors’ interests with senior lenders, which can make it easier to syndicate the deals.
“We will see a growing trend of buyers that are going to want to underwrite their own deals, as it makes economic sense,” an acquisition finance head said.
“If Blackstone is underwriting a deal I don’t see how Blackstone equity would ever allow Blackstone’s underwrite to lose money,” he added.
Others see private equity firms’ ownership of different parts of companies’ capital structures as a potential conflict of interest once the debt is syndicated, if companies run into difficulties.
Senior debt holders are first in line for repayment in stressed and distressed situations and usually negotiate hard with equity holders and can force painful equity injections and debt-to-equity swaps and even take the keys of companies that are seriously underperforming.
“If something goes wrong and senior lenders form a committee to work out what demands to place on the equity, they will be sitting around the table with the equity, which may cause some concern,” the syndicate head said.
Syndication of Merlin’s financing is expected to launch after the August holiday period. A ticking fee is likely to be offered on the loans, which will be syndicated before the outcome of the public-to-private process.
The financing comprises £3.8bn-equivalent of loans including a seven-year term loan B1, split between a euro-equivalent £562m tranche and a US dollar-equivalent £925m tranche, paying an initial 375bp over Euribor and 350bp over Libor, respectively.
There is also a seven-year term loan B2 comprising a €770m tranche and a US$420m tranche with the same pricing as the term loan B1. Pricing on the term loan B facilities has three 25bp step-downs for each 0.25 times reduction in first lien net leverage below 4.9 times.
A one-year bridge loan comprises two £392.5m-equivalent tranches in euros and US dollars paying 650bp over Euribor and 562.5bp Libor, respectively. On maturity, the outstanding bridge loan will term out into an eight-year unsecured term loan.
A US$172.5m seven-year delayed draw term loan is also included which pays 350bp over Libor with a commitment fee of 50% of the applicable margin for the first 90 days, rising to 100% of the applicable margin thereafter.
The deal also includes a £400m 6.5-year multicurrency revolving credit facility (RCF) which pays an initial margin of 300bp over Libor with a commitment fee of 30% of the applicable margin on undrawn amounts.
Pricing on the RCF has four 25bp step-downs for each 0.25 times reduction in first lien net leverage below 4.9 times.
Madame Tussauds owner Merlin listed in 2013, and operates Legoland theme parks globally and Alton Towers Resort in Britain.
In May, activist investor ValueAct Capital urged Merlin to take itself private given the level of investment needed in the firm.
Merlin Entertainments has been affected by Brexit fluctuations in domestic tourism in the UK and a serious accident on a rollercoaster at Alton Towers in June 2015.
KIRKBI has held a significant shareholding in Merlin since 2005 and jointly controlled Merlin with Blackstone until its public listing in 2013. (Additional reporting by Alasdair Reilly; Editing by Tessa Walsh)