Levloan repricing spat shows healthy market
European leveraged loan investors are revolting — resisting margin reduction requests for Iceland and Global Blue and winning concessions. But rather than suggesting that this is symptomatic of a failing product, the amendments won by the buyside actually illustrate the health of the leveraged loan market. And just in time, as the forthcoming Heinz deal means that the sector is facing its greatest challenge in years.
When UK supermarket chain Iceland launched the repricing of its LBO financing earlier in February, hoping to cut 75bp from its €370.171m term loan ‘B’ signed last summer, it was cited as a test for the leveraged loan market in EMEA. After all, it was the first purely European margin reduction to be attempted in months — could the market take it?
But if the Iceland transaction was a simple binary test, then the market failed. The UK firm faced pushback from investors and had to scale back its ambitions, softening its reduction request from 75bp to 50bp. This result was repeated when Switzerland’s Global Blue attempted a repricing on its European line. Although the shopping tourism business has not had to decrease the more aggressive margin reduction request of 100bp off its buy-out loans, it has had to throw in some sweeteners including 101 soft-call protection, a ratchet holiday and the reduction of an incremental facility that adds leverage back on to the firm to get the amendment through.
But are investors being too inflexible and thus endangering the recovery of the European leveraged loan?
It certainly is true that the leveraged finance market globally is softening for the benefit of investors, but only from a very tight starting point. In the US, downward repricing exercises have been cancelled as investors protest over the shrinking margins, while in Europe trades that priced particularly tightly in the high yield bond market in January have been trading off the boil in February.
But rather than signalling the impending doom of the European leveraged loan market, the amendments to the recent margin reductions illustrate a new-found robustness. Investors were unwilling to let the first few repricings through unscathed, worried that this would open a floodgate of margin reductions that would see their whole portfolios repriced, while issuers understood this and gave concessions. In any relationship, there needs to be some tension on both sides, some push and pull that brings about a mutually acceptable conclusion. Should either party simply roll over and accept whatever is thrown at them, it is the first sign that this is not a healthy, mutually respecting relationship. That the European repricing requests brought about discussions and compromises is perhaps the strongest indication that the market is finally recovering from its heart attack in 2007.
And it’s a good job too, as a looming jumbo transaction backing the acquisition of US giant Heinz is being lined up to hit the market. Some $2bn of loans, denominated in euros and sterling, are to be launched in the coming few weeks, one of the largest LBO transactions to hit European investors since the financial crisis.
With no existing European loan debt that investors can simply recycle their commitments from, and with bankers anticipating few concerns over the credit itself, the Heinz transaction could reveal the true health and depth of the post-crisis European leveraged loans market.