Deutsche startles markets with bold Invensys funding
After weeks of denying it was about to execute a capital increase, Invensys, the UK production technology group, this week launched a £2.7bn recapitalisation package designed to solve its liquidity problems and save it from forced asset sales.
The equity part of the transaction was successfully completed on Wednesday, when Deutsche Bank and Morgan Stanley placed £470m of new shares at 21.5p, a 9.5% discount to the day's close.
In the loan market, Deutsche drew gasps of admiration by underwriting the £1.6bn loan element on its own ? unheard of in a recapitalisation deal like this.
"It's a coup for Deutsche," said one head of loan syndications in London, impressed with the nerve Deutsche showed by underwriting such a big ticket for a Ba3/BB- rated company with a troubled history.
Deutsche will also run the books for a £625m seven year high yield bond. Roadshows begin next week in Europe and the US and the bond is expected to be launched in the last week of February.
The whole exercise will net Deutsche around £30m in fees, according to one loans banker in London.
Invensys will also offer to buy back its Eu500m 5.5% bond due April 1, 2005, launched in March 2000. The terms of the offer have yet to be announced, but the bond traded up from 96.20 last Friday to close at 97.70 yesterday (Thursday).
The outlook for Invensys's two longer dated bonds is less rosy. The company has a $250m 7.125% note due January 2007 and a $200m 6.5% bond maturing in December 2010. They are rated Ba3/B.
Dresdner Kleinwort Wasserstein reaffirmed its "sell" recommendation on them.
"From a structural perspective, we note that the proposed loans will be both structurally and contractually senior to the bonds outstanding," said Lior Jassur, head of European high yield research, in a research note yesterday. "At current levels, the bonds reflect, in our opinion, not only a successful refinancing, but also improved profitability and cash flow, which are far from assured."
Invensys was one of the most volatile names in the credit default swap market this week. The price of five year credit protection narrowed by 125bp yesterday to a low of 325bp. It later widened to close at 380bp/410bp, still at least 75bp tighter on the week.
Loans bankers see Invensys as an indicator of whether the prevailing market sentiment is towards risk aversion or the pursuit of assets and yield.
The deal will pay a juicy margin of Libor plus 250bp on the European bank tranche, but Invensys' liquidity problems and unsuccessful asset disposal programme cast a shadow over the credit.
One London syndicator said he was not sure which way the market would go. "Some will be attracted purely by the yield, but other banks will recently have thought seriously about whether they would get their money back at all."
Loans bankers have been wondering why Invensys chose one lead bank when another five relationship banks had helped to provide a $1.39bn rescue bridge loan in 2002. They were Bank of America, HSBC, JP Morgan, Morgan Stanley and Royal Bank of Scotland.
A host of other lenders are also committed to Invensys' two existing syndicated loans ? a $1.5bn revolver maturing in June 2004 and a $1.46bn deal due in August 2005.
The new loan is intended to refinance both these facilities, particularly a $532m repayment due in June 2004.
"We used one bank because the three parts of the refinancing are interconnected and we did not want information on this confidential process scattered around," said a spokesperson for Invensys in London. "Deutsche Bank also made us a great offer. When the refinancing is done it will put us on a solid financial footing for the long term. You can't overestimate the importance of this package to the company's ability to be competitive."
He added that choosing the other banks to participate would be Deutsche's responsibility.
One London head of loan distribution said Invensys had been talking to six or eight banks about putting together a club deal before deciding on a sole mandate for Deutsche.
"People are likely to be annoyed, especially after having worked on different kinds of deal with the borrower," said a head of syndicated loans in London. "It makes you ask, ?What are we missing? What did they think Deutsche have that we don't?'"
But a loan syndicator at Deutsche in London assured EuroWeek the senior relationship banks would be invited at a high level and well paid.
He confirmed that Deutsche had approached six or seven banks to sub-underwrite £300m with a target hold of £100m each. For this they would be paid an undisclosed fee and also offered a share of the high yield bond.
"Comparing the position of a senior lender in Invensys' last deal and in this one, this is better," said the official. "The fees on offer at the top level are not insubstantial because this deal gets done by sharing the underwriting among senior banks to the company."
This secured loan package, which features material adverse change clauses, will refinance all Invensys's bank debt. It includes a £350m five year term loan paying a 250bp margin, a 5-1/2 year term loan ?B' that will be syndicated in the US institutional market and pays 300bp, as well as a revolver, bonding facilities and a second lien loan.