The decision by Heinz to finance all of its $12bn jumbo LBO in the US was a disappointment to Europe’s leveraged loan market. But it cannot have come as a surprise.
The baked bean manufacturer had been marketing a euro-denominated portion of up to $1.4bn and a sterling tranche of up to $600m-equivalent. Demand in Europe would have easily covered these pieces, but Heinz decided that there was plenty of capacity for it to complete all of its loan financing in the cheaper US market.
Heinz is, of course, a special case — being able to raise $3.1bn in a single shot in the US high yield bond market is testament to that. But while other borrowers may not be able to move their loan financing lock, stock and barrel to the US, more and more European credits are looking across the Atlantic for at least some of their funding.
In the first quarter, leveraged loan volumes in EMEA fell 35% year on year, while the US took 77% of global leveraged loan volumes, according to Dealogic figures released on Tuesday.
With liquidity in the US so strong, it is no surprise that many well-respected European borrowers are including dollar-portions in their financing packages. But European credits are also finding that they can use the demand from US investors in the dollar portions of their deals to set similar, cov-lite terms across all of their funding structures.
Evolve to compete
European investors have pushed against covenant-lite features, resisting any efforts to introduce them on their side of the Atlantic. But they need to accept that the best credits are able to access various sources of financing — whether from the US or in the bond market — that offer preferable terms for borrowers. For the European market to evolve to a position where it can compete, these investors need to get over their attachment to covenants.
The Heinz transaction could have been a step in this evolution. Before the 3G Capital and Berkshire Hathaway-owned firm shifted its entire $12bn financing package to the US, investors in Europe were mulling over the jumbo $2bn cov-lite sterling and euro pieces. Bankers report that it was not just European portions of US funds that were looking to invest in these tranches, but real European buyers willing to overlook the lack of covenants to take decent tickets.
It may be a long time before these European investors see another credit of the quality of Heinz cross their desks, but they must hold on to that nascent willingness to take cov-lite paper. Once the leveraged loan market sees the first purely European deal done without covenants, then at last it will begin to establish itself as a viable alternative to its US cousin.