(Adds comments on deal’s reception)
By Yoruk Bahceli
LONDON, Sept 14 (IFR) - Akzo Nobel’s speciality chemicals business may have to widen spreads on the €1.385bn bond backing part of its buyout by Carlyle and Singaporean wealth fund GIC as European investors resist terms that underwriting banks pledged to the sponsors.
Pricing is already under pressure due to competition from Refinitiv’s buyout financing, the largest since the financial crisis.
Analysts at Moody’s and research firm Covenant Review warned earlier in the week that the deal contains off-market, complex terms allowing the company to pay dividends using asset sales proceeds, even when in default.
However, the terms are part of the underwriting agreement between lead banks and the sponsors from March and are therefore unlikely to be changed, a source close to the deal told IFR.
Barclays (B&D on the dollar), HSBC (B&D on the euro) and JP Morgan are global coordinators on the Akzo Nobel deal, with another 16 banks involved.
Several London-based accounts told IFR they are considering making their orders conditional on changes to the documentation.
If enough investors were unwilling to get involved without modifications to the documentation, the company may have to widen pricing to compensate for the additional risk.
Another source, familiar with the deal, said that investors are not demanding yields wider than IPTs, and added that the bonds are not expected to widen from those levels.
“The pricing on the loans and the bonds that is out in the market is meant to reflect what the covenants are, the source said.
But if investors were unwilling to buy without changes to the documentation, it could cause a headache for the leads, as the IPTs on the US dollar tranche are already wider than the cap, or maximum coupon level, agreed with the issuer on that tranche, two sources said.
The Akzo Nobel carve-out business is marketing an 8NC3 senior unsecured two-part bond comprising a €900m-equivalent tranche in US dollars and a €485m euro issue. IPTs on the US dollar bond are 9% area with the euros at high 6s-7%.
The cap is around 8.50%, the sources said, but the euro guidance is not wider than the cap, the first source said.
“While the terms are aggressive, we took a view that they would be acceptable because of who the issuer is, the size of the equity check they’re putting in and the strength of the underlying business and the sponsor,” said the source.
Sponsors are putting €3.38bn of equity into the business as part of the larger buyout financing, which also includes €5bn in leveraged loans.
Similar terms, which would have permitted sponsors to pay dividends from asset disposal proceeds, had been removed from several other high-yield bonds before the deal was underwritten.
“In a landscape of competition, we tried to differentiate between credits and situations,” the source said. The high level of competition in the European leveraged finance market is often blamed for the use of aggressive terms allowing sponsors the flexibility to take cash out of the reach of creditors.
The source said IPTs were likely set wider than where leads see fair value in order to capture attention from Refinitiv’s buyout. The bond portion of that deal was announced on September 5, two days before Akzo Nobel’s, and has similar ratings and IPTs on its unsecured portion.
The difference between the dollar IPTs and cap does not necessarily imply losses for the underwriters, as banks’ fees could cover the difference between pricing and the cap.
Thomson Reuters’ Financial and Risk business, which includes IFR and will be renamed Refinitiv, is being bought out by Blackstone in the largest buyout financing since the financial crisis. The US dollar tranches of the US$5.5bn bond portion are oversubscribed, although euro investors appear less keen on the credit.
But that deal’s aggressive documentation has also ruffled feathers and European investors appear more comfortable with the Akzo carve-out.
Akzo Nobel’s buyout will test US investor appetite for risk when the company’s US roadshow starts next week. Meetings run from Monday to Thursday, the European leg having ended this Thursday.
Spokespeople for JP Morgan, Barclays, Carlyle, HSBC and GIC either declined to comment or did not immediately respond to requests for comment. (Reporting by Yoruk Bahceli, editing by Alex Chambers, Julian Baker)