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LPC-Europe's leveraged loan market shows strength and depth
September 28, 2017 / 3:33 PM / 24 days ago

LPC-Europe's leveraged loan market shows strength and depth

LONDON (Reuters) - Over €5bn (4.40 billion pounds) cleared Europe’s leveraged loan market via five jumbo deals in September and a further €5bn is set to launch from three more loans, illustrating the market’s capacity to digest a number of sizeable transactions at the same time.

A €1.4bn loan and a £266m loan for German generic drugmaker Stada (STAGn.DE) that formed part of a larger loan and bond financing successfully closed this month, as did a €1bn loan for Avantor that formed part of a wider US$7bn financing package backing its buyout of lab supplies company VWR Corp (VWR.O).

At the same time, investors to Europe’s leveraged loan market also digested a €1.09bn and £200m term loan for Dutch-headquartered bottle manufacturer Refresco (RFRG.AS), a €507m term loan for cybersecurity provider McAfee and a €620m term loan for French medical diagnostics company Sebia. All those loans were part of larger cross-border financings.

“The ability to do big deals together at the same time is a new feature of Europe’s leveraged loan market,” a senior banker said.

 A number of banks underwrote jumbo debt financings prior to the summer but opted to hold the paper on their balance sheets with the intention of maximising investor attention after the holiday period.

As the pipeline of potential deals built, some banks considered launching in August in an attempt to avoid a congested September market. However, this was not possible and all deals launched after the summer holidays. 

Investors defied fears that the market would be unable to digest such a backlog of sizeable financings at the same time, having done their homework on the deals in anticipation of such a crowded market.

This has given confidence to sponsors and bankers alike that Europe’s leveraged loan market can handle a large number of sizeable deals and the pipeline is once again building to include €2.5bn-€3bn of leveraged loans backing US private equity firm Hellman & Friedman’s DKr33.1bn (US$5.3bn) takeover offer for payments firm Nets (NETS.CO).

Other jumbo deals in the European pipeline include US$1.4bn-equivalent euro and sterling denominated loans for Blackstone and CVC Capital Partners’ buyout of UK payment processing company Paysafe (PAYS.L) and a €1.02bn term loan for French nursing homes operator DomusVi.

“You have seen one of the first true indications of a properly healthy European market where you have the ability to absorb a considerable amount of paper without breaking or stressing the system. Previously the market was shallow and an increase in paper caused significant indigestion, one big deal was like a python swallowing a pig and the market couldn’t take another big one for at least a month afterwards,” a syndicate head said.

PUSH BACK

Despite their success in clearing the market, the deals closed with adjustments as investors clamped down on aggressive terms.

The €1bn and US$1.953bn leveraged loans backing Avantor, which were part of a US$7bn financing package that also included secured and unsecured dollar and euro bonds, saw changes made to tranches and pricing. 

The discounts on both loans finalised at 98.5 OID from revised guidance of 98-98.5 OID. They originally launched at 99 OID. 101 soft-call also increased to 12 months, from six months.

The loan priced in line with original guidance at 425bp over Euribor with a 0% floor on the euros, and 400bp over Libor with a 1% floor on the dollars.

The dollar term loan was increased from US$1.802bn prior to close, having been reduced from US$2.401bn at launch, while the euro tranche was doubled following strong demand from euro investors.

The loans’ documentation was subject to four pages of changes, as lenders pushed back against weak investor protection. The changes included revisions to Most Favoured Nation sunsets and baskets were tightened to restrict dividend payments and the incurrence of additional debt. The ticking fee was also changed to start paying investors earlier.

“The asks were not out of the ordinary, it was a big deal and investors asked for changes so we had to listen,” a banker close to the deal said.

Despite changes to the loans and the bonds pricing wider than initial talk, all the tranches traded up post-allocation at the end of September. Lead bank Goldman Sachs also made full fees as changes were within the agreed flex, sources said.

Meanwhile, Stada’s €1.4bn term loan and £266m term loan priced at the tight end of guidance at 350bp over Euribor and 450bp over Libor, respectively, with a 0% floor at 99.5 OID.

Yet some push back on Stada caused more investor-friendly changes to margin ratchets and ticking fees.

“Lenders didn’t just pile in without a thought. On big deals investors have more negotiating power and both Stada and Avantor were good opportunities for pushback. The docs were too aggressive and were bought back to a more sensible situation and balanced outcome, rather than being massively lender friendly,” an investor at a big fund said.

Stada managed to close with only two of Europe’s largest CLO managers, otherwise known as anchor investors, committing to the deal, sources said.

“We are in a healthy situation where investors are doing deals but they don’t have to accept everything. There is a pragmatic and realistic dialogue between the buyside and arrangers about what is achievable. It shows the sheer capacity of the market that Stada could get done with only two of the traditional anchor funds,” the syndicate head said.

Editing by Christopher Mangham

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