Second-lien debt in leveraged finance structures has made its debut in Europe, after taking off in the U.S. more than a year ago. "We've seen second lien debt included in a number of recent leveraged finance deals, after Brenntag included E60 million of second lien on its offering in March," said Rachel Hardee, director in European leveraged finance at Fitch Ratings in London, referring to the offering by the German chemicals distributor lead-managed by Goldman Sachs (BW, 5/17).
Since then, Invensys, Cognis, and Samsonite have all included second-lien debt in their offerings, with Cognis issuing as much as E400 million. "Given the voracious demand for leveraged paper in Europe, bankers can put aggressive structures in place and investors appear willing to accept this," observed Hardee. She pointed out that over the past 12 months Fitch has seen a trend toward declining equity contributions by sponsors, which is further facilitated by the inclusion of an additional layer of debt in the capital structure.
Martin Thorneycroft, executive director in European capital markets at Goldman, said that the use of second-lien debt in structures enables some issuers to benefit from tighter pricing relative to high-yield or mezzanine debt. Further, it maximizes the universe of buyers who are able to participate in the junior piece of the capital structure in certain situations, he said. Hardee observed, "The second lien facility is subordinate to senior secured debt and has minimal prepayment fees and/or call protection. However, it is substantially cheaper than the mezzanine debt, even though on the Brenntag and Cognis transactions it has a similar maturity profile." She pointed out that on the Brenntag deal, the second-lien paper pays LIBOR plus 450 basis points, while the mezzanine pays 5% cash and 6.5% PIK. Cognis downsized its high-yield offering by E100 million when it upsized it second-lien facility by the same amount.
