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Demand begins to run out in bulging LBO loan market

28 Jul 2005

After a long and powerful bull run, the European leveraged loan market is struggling to cope with the rising tide of big leveraged buy-outs, and several loans are suffering in syndication.

Wind, the Italian telecoms company going through Europe's largest ever buy-out, has only managed to collect a little over Eu4bn of commitments towards the nearly Eu8bn of senior and second lien debt its purchasers need.

Bankers outside the deal do not believe it will be fully subscribed. "This deal is giving us an indication of what the maximum capacity of the European leveraged loan market is," one banker told EuroWeek on Tuesday.

Wind is certainly an ambitious LBO. The Weather consortium, led by Egyptian entrepreneur Naguib Sawiris, is paying Eu12.1bn — more than twice what BC Partners, CVC Capital Partners, Permira and Investitori Associati paid for Seat Pagine Gialle, the Italian telephone directories business, in 2003.

But the talk in the leveraged finance market this week was that more modest deals for Pirelli Cable, Debitel, Partners in Lighting, British Vita and Sigmakalon were also faltering.

As far as Debitel is concerned, its detractors may be wrong — the deal has been shrunk and shortened, but bankers say that is because the German mobile phone company is throwing off plenty of cash and owner Permira will need less debt in the recapitalisation.

But bookrunners on the other deals admitted the transactions were a tough sell, particularly because of the huge amount of debt being put through the market. "People are having a great deal of difficulty evaluating all the potential commitments," said a loans banker at one bookrunner.

The first warning signs that the leveraged loan market might be emerging from its 18 month thirst for paper at ever more aggressive terms came in May, when the banks recapitalising Debenhams, the UK department store chain owned by CVC Capital Partners, Merrill Lynch Private Equity and Texas Pacific Group, had to increase or 'flex' the fees to attract sub-underwriters.

At that point some thought the lenders' hesitation was specific to that deal, but over the last two months, as deals have flooded the market and allowed investors to get fussier, bookrunners and mandated lead arrangers have had a much tougher time, culminating this week in the realisation that many deals are facing an uphill climb in syndication.

The most visible of these by far is the buyout of Wind from Enel, the Italian electricity company. Bookrunners ABN Amro, Deutsche Bank and Sanpaolo IMI have something over Eu4bn of commitments, including their own target holds, for the Eu7.23bn of senior debt and Eu700m of second lien.

They have flexed the margin on the second lien tranche from 525bp to 625bp. Still more unusually, they are offering institutional investors a 1% up-front fee to commit to the deal. Usually only banks, and not fund managers, get fees.

"This got a lot of people off the fence, as well as brought in some parties that had originally declined the deal," said one banker involved in the syndication.

Earlier this week the leads were telling investors the book stood at Eu3bn. They plan to close the syndication by early next week, whether it is fully subscribed or not.

"There are still a number of lenders looking at it," said another banker involved. "There were some waiting for the rating to come out and for the half-year trading update."

The senior secured debt is rated B1/B+/BB and the second lien B2/B/BB-.

Some argue that Wind's difficulties are not representative of the LBO market as a whole, since the purchaser is not a private equity house. Sawiris, who owns Egyptian telecom company Orascom, and his family have teamed up with Philippe Nguyen, head of French private investment group IPE, and Wilbur Ross, the US buy-out investor.

Debitel's deal is on track despite negative talk in the market. The size was reduced but apparently because it has generated excess cash since the deal was signed with mandated lead arrangers Commerzbank, JP Morgan (bookrunner), LBBW and Lehman Brothers (bookrunner).

Complex deals punished
Bankers admitted that the loan for Goldman Sachs Capital Partners' Eu1.3bn purchase of Pirelli's energy and telecom cables and systems businesses has not been an easy deal, and in a crowded market the more complicated transactions get pushed aside by investors.

However, the bank debt is expected to be oversubscribed by tonight (Friday), the institutional carve-out is oversubscribed and the second lien is 100% oversubscribed.

The margin on the 'A' loan was increased from 150bp to 200bp. Originally the plan was that the margin would be below market for the first year and then go up to 200bp — close to the standard rate of 225bp — if the loan was not replaced with a securitisation. But the banks decided that the 'A' loan needed to pay 200bp from the start.

The second lien is paying a healthy 700bp, which is seen as attractive, compared to pricing on the second lien of Wind at 625bp or the recent 600bp for the second lien portion of Finnish bathroom product manufacturer Sanitec.

Goldman Sachs, JP Morgan and Lehman Brothers are the bookrunners. The loan package consists of Eu1.38bn of senior debt, a Eu150m second lien tranche and a Eu300m performance bond.

"The market is very nervous and twitchy and perfectly good deals are trading down in the market," commented one banker.

Facilities for the buyouts of British Vita — the UK specialist polymer group being bought by Texas Pacific Group for £668m — and Dutch chemicals group SigmaKalon are progressing slowly.

ING and Merrill Lynch are leading SigmaKalon and JP Morgan is the sole bookrunner on British Vita.

The bank meeting for SigmaKalon's Eu1.44bn recapitalisation was postponed because of the bombings in London on July 7 but the commitment deadline, which was for today (Friday), was not changed. The banks have now extended it for another week.

ING and Merrill Lynch have received some declines and some commitments but most potential investors are still looking at the deal. "Investors are saying to us, 'yes, we are having to pick and choose, and this is one of the more aggressive of the deals, but we like the credit,'" said one bookrunner. "It's a bit early and harsh to say it's struggling given the volume of deals. But we feel we will complete the syndication in one phase."

Bankers working on selling British Vita are not overly concerned. "People are really snowed under right now," said one.

ING is long on the recap of Partners in Lighting, a Belgian lighting business owned by CVC. The bank has received about 12 commitments and is expected to come back to the market to syndicate the deal further on the back of good current trading. There is also a withholding tax change in Belgium that should help investors be more comfortable with lending to the borrower.

"The credit is deleveraging quickly," said a banker familiar with the deal.

It is still not clear if these more difficult syndications are translating into less aggressive structures on pitches for new business.

"You would think it would translate to less aggressive structures, but banks still want to win deals," said one observer.

Another head of leveraged loan syndications said the market was fundamentally OK — that portfolios of leveraged loans were healthy. He said pitches were getting less aggressive, however, because the supply and demand imbalance has suddenly reversed, putting the power in the hands of the lenders.

Taron Wade

28 Jul 2005