The £2.81bn leveraged buy-out that Lehman Brothers and Royal Bank of Scotland arranged for UK casino operator Gala Group's acquisition of Coral Eurobet last year flew through the market thanks to a large investor base already familiar with both companies. It also highlighted the growing importance of institutional investors to the European LBO market.
Tanya Angerer reports on the deal that banks, borrowers and investors voted EuroWeek's best LBO loan of 2005.
The leveraged loan backing Gala's acquisition of bookmaker and fellow gaming company Coral Eurobet set a record last year for Europe's biggest ever mezzanine tranche, a £460m piece of debt that sat below £2.2bn of senior debt and £150m of second lien.
It was a bold move on the part of bookrunners Lehman Brothers and Royal Bank of Scotland to syndicate such a large mezzanine facility, but both were confident that lenders would receive with enthusiasm a deal that involved two well known and highly regarded companies.
"People felt the combination of the two created a knock-out credit in terms of proven track record, stability, cash generation and management team," says Richard Howell, head of leveraged capital markets at Lehman Brothers in London.
Syndication of the £2.81bn deal began in October, just a few weeks after Lehman Brothers and RBS completed a second recapitalisation of Gala for Candover Investments, Cinven and Permira.
Coral Eurobet has also featured frequently in the leveraged loan market. Private equity firm Charterhouse Development Capital completed a second recapitalisation of the company in February last year in a deal also arranged by Lehman Brothers.
Because both credits had already made use of the leveraged loan market, buy-out firms Candover, Cinven and Permira were familiar with both companies' lending bases, while those lenders were equally familiar with the businesses behind the buy-out.
The bookrunners were so confident that the buy-out would be a success that they opted for a one-step sell down, eschewing a sub-underwriting phase to move straight to a syndication, during which lenders were offered three take and hold tickets.
Lead arrangers could commit £55m for 70bp, arrangers £40m for 60bp and co-arrangers £20m for 50bp.
The three sponsors provided £325m of equity, and, including equity contributed earlier by Gala, the total equity injected was £1.5bn, or about 37.5% of the deal.
Before syndication, Bank of Scotland joined as a mandated lead arranger and underwrote senior debt on a pro rata basis. Intermediate Capital Group also provided £90m of mezzanine debt on a take and hold basis.
Leverage on the Gala Group transaction was 5.3 times senior net debt to Ebitda, 5.7 times including the second lien, and 6.9 times in total.
"When it came to this deal, we were pretty confident of the level of demand and liquidity for the two merged companies," says Howell. "Though the new deal pushed leverage a long way north of previous deals we didn't really feel it justified a high coupon."
The senior debt on Gala Group's £2.81bn loan paid margins 25bp lower than standard LBO pricing, just like the 'B' and 'C' tranches on the separate recapitalisations arranged for Gala and Coral Eurobet earlier in the year.
Senior debt, which was oversubscribed by 60%, was split into five pieces: a £530m seven year term loan 'A' that yields 225bp over Libor; a £710m eight year term loan 'B' that pays 250bp; a £710m nine year term loan 'C' that has a 300bp margin; a £200m seven year acquisition capex facility that pays 225bp; and a £50m seven year revolver yielding 225bp.
So popular was the £150m nine year second lien tranche that it was almost four times oversubscribed, enabling the bookrunners to lower the margin by 37.5bp to 462.5bp.
The £460m 10 year mezzanine tranche was almost three times oversubscribed after raising £1.2bn, and its coupon was cut by 75bp to 825bp, split between 4% cash and 4.25% payment-in-kind (Pik).
Also striking was the way in which Lehman and RBS accommodated burgeoning demand from hedge funds and other institutional investors by including in the deal a £425m carve-out of both the institutional 'B' and 'C' tranches.
The £850m of debt directed to non-bank lenders comprises one of the biggest collective commitments that institutions have made in the European market and, bankers say, is indicative of how Europe's leveraged loan market is becoming more like the LBO market in the United States.