European leveraged loan bankers used to be almost permanently braced for bad news. With a market far less liquid than in the US, and with European funds sticking rigidly to their requirement for covenants, theirs was not an easy cause to sell.
With the dollar so attractive, some European issuers regularly chose to denominate their loans exclusively in dollars and distribute in the US. Heinz did so with its new $12bn debt in March, as did Merlin Entertainments on a smaller credit facility just last month.
But for borrowers in Europe, the recent cov-lite loan from Oxea, a German chemicals company, may be the clearest sign yet of a change in the balance between the two markets.
Originally, the deal had looked like business as usual: a dollar-denominated term loan ‘B’ worth $720.5m would dwarf the planned €200m tranche. But after a surge in demand for more euros, which surprised even the bankers working on the transaction, the company was able to raise the euro portion by a further €250m and reduce the dollar portion to just $535m, or €406m-equivalent. In that deal at least, the euro finally had the upper hand.
Size is one thing, but it's on pricing where Oxea’s deal shows even better how the differential between the European and US markets has been eroded. At 350bp over Euribor, the euro-denominated tranche is just 25bp higher than the tranche denominated in dollars. That would certainly have been unthinkable 18 months ago, for instance. Even as recently as the Heinz deal, investors were expecting a premium of between 37.5bp and 50bp for the euro piece before it was pulled.
As a result, market participants are starting to question the view that issuing debt in dollars and converting it back to euros is any more appealing than simply marketing the deal in Europe in the first place.
For all this development, though, no one should jump to the conclusion that European investors have suddenly overcome their wariness of cov-lite facilities, nor that liquidity in Europe will start rivalling the US any time soon. For large deals, loans bankers are still likely to encourage borrowers to stick with cross-border deals so they can use US investors’ liquidity to exert some pricing pressure.
But for others, a deal like Oxea has shown what is possible. European issuers should take advantage of a developing appetite among their region's investor base and put the emphasis firmly on their home currency. They cannot yet cut their ties with dollar tranches entirely, but it is in their interests to do everything they can to help develop a liquid and deep euro market — one that can give the dollar a real run for its money.
