LONDON, Aug 28 (LPC) - Billions of euros of leveraged loans will be competing for European investors’ attention in September, as arranging banks rush to derisk and reduce exposure before the looming October 31 Brexit deadline.
At least 20 mandated deals totalling around €25bn are expected to launch in coming weeks, bankers said, including an unusually high number of loans backing take-private deals supporting private equity firms’ acquisitions of listed companies.
Britain’s anticipated exit from the European Union at the end of October creates a relatively short window for execution. Few borrowers or arrangers are willing to risk increased volatility and market risk and want to be out of the market before the deadline.
“Just sell it as soon as possible. It’s the strategy,” a banker said. “For most of the deals, you could argue that Brexit doesn’t matter, but you want to get things out of the way ideally before you have market volatility.”
Volatility is already rising in the currency market, where the prospect of a no-deal Brexit continues to put sterling under pressure after a 6% drop since May.
Some of the public to private deals on the launchpad include a £1.387bn financing backing the buyout of car auctioneer BCA Marketplace and £3.8bn-equivalent of loans backing the acquisition of UK theme park operator Merlin Entertainments.
A US$3bn-equivalent debt financing backing advertising and public relations company WPP’s data analytics unit Kantar is also expected to launch.
In addition to the raft of take private deals, add-on deals and refinancings are also on the menu, and bankers are ready to act fast to secure a first mover advantage for their deals to avoid market congestion.
“It’s a mix of everything. There are quite a few of take-private deals in the mix, just more than we normally see,” a second banker said. “It will be a busy month.”
The leveraged pipeline totals US$26bn, according to LPC data, 28% lower than US$36bn at the same point last year, but bankers are confident that the deals will be well absorbed by the market.
Demand is strong due to a drop in European leveraged loan volume, which at US$73bn at the end of the first half was 42.5% lower than mid 2018, and investors remain hungry for good deals. “We’ve had strong sentiment in the last four months, although volume remains down,” a third banker said.
Market dynamics are very different from the same time last year, when the market was dominated by jumbo deals including a US$13.5bn financing package backing Blackstone Group’s acquisition of data business Refinitiv, and a US$7.6bn financing backing Akzo Nobel’s spin-off of its chemicals business.
Bankers are confident that the current crop of deals will be well received due to ample investor liquidity, as CLO issuance remains robust and managers continue to target higher-yielding assets.
CLOs are the biggest buyers of leveraged loans and European issuance of €14.3bn was 7.5% higher in the first six months of 2019 compared with a year earlier, according to LPC data.
“CLO issuance is encouraging, so I think it’s fairly positive,” the third banker said.
Tightening pricing on several recent deals, including Maltese mobile operator Melita’s €275m term loan and German medical homecare company GHD’s €360m refinancing, also reflects strong demand for popular credits.
Melita priced its loan at 400bp over Euribor, lower than initial guidance of 425bp-450bp, while GHD priced at the tight end of guidance of 400bp-425bp.
Investors remain wary of potential credit issues and continue to prefer large liquid deals. This may mean that some deals for smaller companies, which are potentially more exposed to economic headwinds, could struggle as a result.
“There is always a risk for small deals to be pushed aside, we have seen that happen before,” a leveraged loan investor said. “They usually have aggressive terms and do not have strong sponsors.”
Leveraged credits with strong market track records could also stand out from the crowd. This includes some of the public to private deals, which are returning to private equity ownership.
“We look at credits which once existed in the leverage space, such as Merlin and BCA. Those are probably the kind of deals that would attract good support,” another investor said.
Merlin last tapped the leveraged loan market in 2013 with £1.4bn-equivalent multi-currency refinancing Term Loan B and replaced it with unsecured loan two years later. BCA is also a well-known credit in Europe’s leveraged loan market with a history of private equity ownership prior to being taken public in 2015.
Given its UK focus, BCA’s deal will be closely watched by the market, as it will test investors’ appetite for UK risk post-Brexit, and tolerance for businesses with high UK exposure.
“For UK deals, you just need to persuade people that a business still works in a hard Brexit scenario,” the first banker said. “They have to come up with a story that the business is economically resilient.” (Editing by Tessa Walsh)