April 16, 2019 / 9:06 AM / 10 months ago

I-banks bag bigger share of European buyouts

LONDON, April 16 (LPC) - Private equity firms are changing the way they reward underwriting banks on European buyout loans to favour investment banks over commercial banks, and gain greater control over who is holding the debt.

Underwriting fees and loan commitments are usually equally distributed based on the amount of balance sheet that banks were willing to provide in Term Loan B and undrawn revolving credit facilities (RCFs).

But private equity firms are now reducing the amount of RCFs that investment banks have to provide and giving them a bigger share of the more profitable TLB underwrite.

Commercial banks, on the other hand, are being asked to hold more low-yielding RCF paper and underwrite less of the TLB business, which is squeezing their returns.

“Non pro-rata payments, where there is a disproportionate distribution of RCF relative to the TLB is increasingly happening,” a head of capital markets said.

Investment banks typically lead large buyout loans, but with smaller balance sheets, find it difficult to provide RCF and capital expenditure facilities that tie up capital.

They have long argued against the equal division of underwriting fees as unfair as it does not reflect the distribution work done as “lead left” arranging banks.

One lead left bank typically does all the ratings, execution, planning, Q&A and negotiating of documentation terms while other banks provide only underwriting capital.

Investment banks can lead around 30 to 40 deals a year, which gives them thorough knowledge of the investor base, while some commercial banks may only lead three, several bankers said.

“The investment banks see the unfunded paper as a P&L drain so if sponsors can help out by giving a greater portion of the unfunded facilities to commercial banks then that will benefit the investment banks and help sponsors maintain good relationships with them,” said one head of capital markets.

Placing a higher proportion of RCFs with commercial banks also helps private equity firms to control who is holding the debt as it also curbs investment banks’ sales to hedge funds, which were often at a loss-making 80-85% of face value.


The unequal distribution of fees and paper is understandably controversial with commercial banks, some of which have already turned down opportunities to finance private equity firms’ auction bids after sponsors made it clear that they will not offer pro-rata payments.

Commercial banks are also concerned that they could lose contact with the institutional investor base if they are shut out of lead roles.

“Banks prepared to accept these terms are idiots because they are positioning themselves as ‘stuffee’ banks and giving up any aspirations to lead deals. They are saying please kill us, feed off us and treat us as easy meat. They are wilfully trotting off to slaughter,” a second capital market head said.


Such unequal distribution has already been seen on a handful of leveraged loans this year, including the €1.092bn term loan backing reusable packaging provider IFCO Systems’ buyout by private equity Triton Partners and Abu Dhabi Investment Authority that closed in April. Other deals distributed in this way include publicly traded UK-based technology company Laird and Flora Food Group, sources said.

An unequal split between TLB and RCF underwriting is also expected to be seen on an upcoming refinancing which has been underwritten by investment and commercial banks, and more private equity firms are asking for it on deals that are still in the auction process.

Lead-left banks typically include Goldman Sachs, JP Morgan, Deutsche Bank, Credit Suisse, BNP Paribas, Barclays, Citigroup and Morgan Stanley, sources said.

“From an underwriting capability perspective there are leaders and followers. Sponsors will generally want one of the top five banks to run a deal. Commercial banks don’t have the sales capability,” the first capital markets head said.

Commercial banks are also trying to compete against each other by offering more of their balance sheets to private equity firms to win coveted underwriting slots and improve relationships with sponsors as the deal pipeline remains thin after December’s volatility.

Commercial arranging banks include Commerzbank, Credit Agricole, ING, Lloyds, Mizuho, Natixis, NatWest Markets, Nordea, SMBC, Societe Generale, Rabobank and UniCredit.

Some commercial banks are accepting the changes in pay distribution to build a stronger relationship with a sponsor, bag a better role on other deals or get into large deals which they otherwise may not see.

“The European market is so heavily overbanked, one of the only ways banks can compete at the moment is balance sheet. If you provide balance sheet that does win a relationship because balance sheet-friendly banks are helpful, and that is where some of the commercial banks can step up,” a syndicate head said.

Editing by Tessa Walsh

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