When the Swedish government announced its Skr200bn (Eu20.8bn) privatisation programme, Vin & Sprit, the maker of Absolut vodka, was considered by many to be the crown jewel of the assets on sale. The bidding process for the distiller reflected just that. Four companies wanted to buy it: US company Fortune Brands, Bermuda-based Bacardi, Swedish private equity group EQT and Pernod Ricard, the French drinks group. Such was the demand that analysts expectations of a Eu4.2bn price tag were shattered, with Pernod winning the bid on the last day of March with a Eu5.63bn offer.
Pernod was no stranger to big acquisitions. In early 2001 it bought part of Canadian drinks group Seagram for $3.15bn. In 2005 it paid £7.4bn to acquire Allied Domecq, the UK distiller.
Neither was Pernod a stranger to the syndicated loan market. These previous acquisitions had been financed by bank facilities of Eu5.2bn and Eu9.5bn, respectively. Both these deals had passed through syndication easily and both were oversubscribed.
As such, Pernod was confident about its latest loan, which it secured for the V&S takeover. The deal was Pernods biggest yet at Eu12bn (about half of which refinanced existing debt). But it had a strong group of relationship banks and it had proved its ability to deleverage quickly, something which was vital given that the V&S takeover would leave Pernod with debt of more than six times Ebitda.
But when the facility was launched in the second week of April, the loan market was far from being in the same state of rude health as it was during Pernods previous deals. Bankers still thought of Pernod as one of western Europes premier borrowers. But this was the biggest crossover deal ever seen (Pernod was rated Baa2/BB+/BB+) and it was being launched at a time when the loan market was beginning to feel the effect of the previous Augusts credit crunch for the first time.
Still, Pernod, known as an aggressive borrower, decided to give little concession to lenders. Its six underwriters BNP Paribas, Calyon, JP Morgan, Natixis, Royal Bank of Scotland and Société Générale launched the deal, which was denominated in euros and dollars, with a one year tranche paying Euribor plus 90bp, three year money paying 110bp and five year pieces that had 125bp margins.
Several bankers baulked at the pricing immediately, with some saying that, given the borrowers rating and leverage, it was at least 50bp too tight. One even deemed the bookrunners irresponsible and said they should flex the facility before the bank meeting was held.
For their part, the bookrunners emphasised Pernods cashflow and insisted it should be viewed as an investment grade credit with a robust flow of ancillary business.
Early signs suggested that the arrangers were right. Bank of Tokyo-Mitsubishi UFJ and Crédit Mutuel-CIC soon committed to the top ticket of Eu500m. They were followed by Deutsche Bank, ING, SEB and Svenska Handelsbanken.
But syndication began to stall a few weeks after launch, forcing Pernod to offer banks more side business. These efforts failed, however, and in April the deal was flexed up by 30bp and reduced by Eu500m, making Pernod the most high-profile victim of the investment grade markets woes.
It is unclear to what extent the flex worked. More banks joined the deal, but none are thought to have done so on the top ticket. Sources said that the six arrangers were left with holds of just under Eu1bn each.
The fact some of those had not reached their target holds was reflected by Pernods deal dropping sharply in the secondary market. Shortly after it was signed, it was quoted at 96.75 pro rata.
But, Pernod was satisfied with its facility. We have a package that is comparable with the one we had for the Seagram acquisition, says Olivier Guélaud, Pernods treasurer. And the spread is more favourable than the one we could have had in the bond market.
But for the loan market, Pernods deal marked a turning point. It showed that borrowers no matter what their standing had to pay up for scarce liquidity. Banks, with their funding costs increasing by the day, would not accept otherwise.