Nordic Capital is seeking Skr8.9bn (Eu957m) of debt to recapitalise Ahlsell, a wholesaler of electrical, plumbing, heating, refrigeration and water equipment.
Loan investors complained this week that Nordic Capital had watered down the clause that protects lenders from a change of control at Ahlsell. Instead of the debt having to be refinanced if there is any change of control — the usual practice in leveraged finance — Nordic will be allowed to sell the company to any of a specified list of leading private equity houses, and leave the debt in place.
That will make it easier for Nordic to dispose of the company, but makes the future highly uncertain for lenders.
Far from fighting off this new encroachment on their defences, however, leveraged finance banks are already taking calls from other venture capital houses, asking if they can copy the clause.
John Tiner, chief executive of the Financial Services Authority, warned this week in a speech to bankers in London: "We have the feeling that the [leveraged loan] market is getting increasingly nervous, prompting the question: which deal will be one too many, and who will be left holding the pieces?"
The weakening of the Ahlsell covenant suggests that private equity funds are still on top in the European leveraged loan market's wrestling match, even though in July investors appeared to be holding them off for a while when a glut of large deals faltered in syndication.
In fact, only the leading leveraged finance banks, and not the funds, ended up being squeezed.
Bankers say that although deals were harder to syndicate for a while, the loans were underwritten, so the private equity funds did not lose out. On the origination side, the buyout houses never stopped pushing hard, and banks kept competing with aggressive bids.
The transactions that struggled in July — including Eu1.8bn for Goldman Sachs Capital Partners' acquisition of Pirelli's cable manufacturing business and £663m for Texas Pacific Group's buy-out of polymer firm British Vita — have now largely cleared the market.
The one major exception is the Eu8bn of debt for the Weather consortium's buyout of Italian telecom firm Wind — syndication will close soon but bookrunners ABN Amro, Deutsche Bank and Sanpaolo IMI are still long the debt. They have not said how much they hold but other bankers speculated it could be as much as Eu1bn each.
In another illustration of how little the private equity funds seem to be worried about the loan market losing appetite for their deals, Bain Capital has tried to throw its weight around with the documentation on its Eu1.44bn recapitalisation of chemical company SigmaKalon.
This is one of the deals that has struggled in syndication and bookrunners HSBC, ING and Merrill Lynch are thought to still be a little long, though one of them said the deal was fully subscribed this week.
Bain has upset investors by demanding restrictions on transferring the loan — one of the fronts on which sponsors are trying to push back lenders.
But in this case the investors carried the day and Bain has agreed to change the language.
A bank investor who participates in leveraged loans said he was seeing weaker covenants and more aggressive ratchets on pricing.
Bookrunner Morgan Stanley and mandated lead arranger Nordea held a bank meeting on Wednesday morning for the Ahlsell recapitalisation. HSH Nordbank and Dresdner Kleinwort Wasserstein are joint lead arrangers.
The structure permitting a sale to specified private equity firms is unusual, although it has been used by cable television companies such as Iesy of Germany and the UK's NTL.
"We knew this was going to be controversial, but we think the banks will get comfortable with it because it is a fundamentally good business," said a banker familiar with the deal. "We think the credit will overtake the change of control issue."
The Skr1.24bn mezzanine loan is already preplaced with investors, including Park Square Capital Partners and Goldman Sachs' mezzanine fund. Two large institutional investors are expected to commit to the deal early next week.
Total leverage is five times Ebitda and senior leverage is four times.
Senior debt is split into a Skr2.24bn seven year term loan 'A' that pays Libor plus 225bp, a Skr1.4bn eight year term loan 'B' paying 275bp, a Skr1.4bn nine year term loan 'C' that pays 325bp, a Skr500m revolver — which is preplaced — and a Skr625m second lien with a margin of Libor plus 500bp.
Taron Wade
