CeramTec achieves perfect LBO in difficult conditions
The financing behind the CeramTec buy-out proves that a European credit can command strong support in the transatlantic leveraged loan market. Olivier Holmey finds that a flexible debt structure, a popular name and a popular sector are the perfect ingredients for a blowout LBO.
When any primary buy-out is announced in the loan market, investors grow excited. The dearth of new money deals in a sector dominated by refinancings and restructurings makes every newcomer attractive. And so it proved when CeramTec came to market.
It did have a bit of a head start of course. Before its acquisition by private equity firm Cinven earlier this year for €1.49bn, the pharmaceuticals company belonged to Rockwood Holdings, a conglomerate of chemicals and advanced material businesses. As a division of Rockwood, all investors to the company also received reports on CeramTec.
Significantly, they could see how consistently CeramTec has performed over the years, including during the economic downturn of 2009. Last year it generated revenues of €425m.
Because CeramTec’s only debt had been inter-company financing provided by Rockwood, the market viewed the company as a debut issuer — just the type of credit for which lenders are always on the lookout.
Interest for CeramTec was also largely a factor of the sector to which it belongs. Although the business produces ceramic components for various industries, it focuses primarily on healthcare. This appealed to investors looking to enter businesses with a constant cashflow rather than those which are more cyclical in nature.
“CeramTec is expanding a medical plant which we expect will increase the company’s output of medical products and, as a result medical cashflows,” says Christopher Anderson, a principal in the financing team of Cinven in London. “That is just the kind of thing that investors like to see.”
But a good name does not ensure a deal’s success, and CeramTec worked hard to capitalise on its popularity.
For CeramTec, that meant issuing its financing package as a transatlantic deal — for the US and European markets — in both dollars and euros. By so doing, the company stayed close to its roots in Europe — it started in Bavaria and 14 of its 25 sites are still based on the continent — but opened itself up to the much more liquid US market.
At first, leads Deutsche Bank, RBC CM and UBS expected to raise half of the €650m-equivalent term loan ‘B’ in euros and half in dollars. But they remained flexible: once they saw the level of interest from investors in the US, the tranche was split between $472.5m and €291.3m.
“We were pretty much agnostic on the currency of the term loans because it is possible to hedge quite affordably between euros and dollars at the moment,” says Anderson. “Our approach was to start off assuming a 50/50 split and wait and see what the market told us; we knew upfront that there was a good chance that we would end up choosing to do more euros than dollars or more dollars than euros.”
As a result, CeramTec was able to achieve very aggressive terms. The company’s debt to Ebitda multiple reached about 4.7 times on the senior tranches and seven times on the total debt — unusually high figures for a European borrower. But strong support from the US, where such leverage ratios are commonplace, convinced investors in Europe as well. In the end, not a single covenant was required to get the deal done.
Moreover, the borrower successfully reverse-flexed both the dollar and euro portions: the former was priced at 325bp over Libor, after being marketed at 400bp-425bp originally; the latter was revised from 425bp-450bp over Euribor to 375bp over.
The €306.7m bond, which completed the acquisition financing, was also priced at the tight end of guidance to yield 8.25%. By contrast, most European triple-C bonds in the secondary market fall in the high 8% region.
Yet timing very nearly derailed the issuance of both the loans and bonds. Only a week after Cinven had agreed to the buy-out in early June, Ben Bernanke gave a speech on the prospects of quantitative easing. In it the chairman of the US Federal Reserve suggested the central bank would reduce its asset purchasing programme and bring it to a close by early 2014 if certain economic conditions were met.
Bernanke’s comments led to a sharp sell-off in global bond and equity markets, with many leveraged deals hit by the volatility. One for foam manufacturer Armacell, another German credit, saw its pricing rise by 100bp. But CeramTec avoided such troubles by pacing its issuance and waiting for the markets to recover.
“Markets gradually improved and we received a substantial amount of reverse enquiries from leveraged investors because this particular business resonated very well with them,” Anderson explains. “At the time we launched the deal in late July the market knew broadly what to expect, and had in many cases made sure they had put aside some liquidity for it, so to speak.”