European leveraged loan arrangers are puzzled. They say — and they are surely right — that they would be laughed out the room if they called an investor meeting to launch a euro deal with incurrence covenants. Loan investors in Europe just don’t do cov-lite.
At least, they used not to. Ineos just managed to sell €500m of the stuff, Bausch & Lomb is syndicating some $600m and Grohe wants at least €100m.
Three deals in the space of two weeks might seem like the start of a trend, but these deals will not be the norm — and they categorically do not mean that the European market can now support a cov-lite deal on its own. These deals are being driven by North America, not Europe. Leveraged loans in the US are hot property at the moment, and investors there can’t start getting pernickety about covenants.
These European companies have seen this, and have realised that it is only by playing the European loan market off against the US loan market — and in Ineos’ case, off both euro and dollar bond markets too — that they can raise covenant-lite money in euros.
Thanks to this competitive tension, the choice for European investors looking at Ineos was simple: no maintenance covenants, or no deal.
With euro deals in short supply, enough European investors were carried along by the transaction’s momentum. Well played Ineos — and hardly a terrible result for the euro investors, who benefited from other terms that the US demands but are rare in Europe, such as a 1.25% Libor floor and 102/101 soft-call protection.
But this clutch of deals is unusual because without the dollar angle, European borrowers do not have sufficient leverage over investors to demand more flexible covenant structures. And only a minority of European borrowers could realistically hope to attract enough US interest to make the dual approach worthwhile.
That will leave most looking for pure euro financings, but the only cov-lite route there is to play the loan market off against the bond market. Orange Switzerland did exactly this earlier this year, eventually saying goodbye to its euro term loan ‘B’ in favour of an less onerous FRN.
With the European high yield market so fickle, not to mention expensive, that is unlikely to be repeated often. European loan managers also often have high yield funds: toying with them can be risky for an issuer.
Loan investors will fight for their covenant protection where they have the power to do so. When that power is taken away, they will simply figure out whether staying in a credit is worth the compromise in documentation. It is a perfectly logical way of getting the best terms possible for their portfolio.
So arrangers can moan all they like about this apparent inconsistency in investors’ stances: just don't expect it to change soon.