A slew of high-yield deals backing European leveraged buyouts are seeing unprecedented support because of a reworking of the capital structure treatment of bank loans and bonds. A deal for Focus Wickes is the latest transaction to address the concerns of high-yield investors--who want the same rights as other creditors through direct contractual subordination--and the banks' desire to keep the high-yield investors out of the restructuring process, said Edward Eyerman, analyst for Fitch Ratings.
The bonds in the European high-yield market typically have had inferior structures, with no claims against operating assets and bond investors subordinate to all creditors. So the high-yield investors in Europe saw recovery rates much lower than those in the U.S., where the high-yield market relies on contractual subordination, said James Amine, managing director and head of European Leveraged Finance in London for Credit Suisse First Boston. "In order to satisfy investor demands, a number of deals have come out with enhanced structures," he said.
Bond and bank debt financings for Heidelberg Cement, Teksid, Nycomed, Ardaugh, and Brake Bros. illustrate the changes afoot in the European high-yield market, said bankers. High default rates in the telecommunications and cable markets led high-yield investors to look at the structure of their investments and they quickly realized that they were often in positions worse than equity holders in a company, stated Kelly Gromoll, head of European high-yield sales for BNP Paribas. "When investors are losing money, they learn that 'position in life is everything,' meaning that they realized they had to push structural issues to the forefront," she said.
The Focus Wickes deal is the most recent example of the changes. It is a hybrid deal, whereby the mezzanine notes feature a high-yield covenant package and a borrowing structure typical of a mezzanine tranche. Senior lenders though, still have ample security. "Compared to traditional mezzanine from an inter-creditor position, the senior lenders are in a better position with the mezzanine notes because the mezzanine notes lack the enforcement rights on security, a shorter standstill period in the event of default and the stronger covenant package typical of a mezzanine piece," noted Nicholas Coates, head of the European high-yield group for Royal Bank of Scotland, the bank arranging the deal alongside ING Bank. But the package puts the mezzanine note-holders ahead of the unsecured trade creditors, he added.
There is mixed interest in the enhanced structures from the senior lenders' perspective, added Gromoll. They want the benefits of a senior position, but many senior lenders have high-yield businesses themselves and need to take into account the interests of both sides of their business for the overall benefit of their franchise, she explained. "That mentality facilitates high-yield transactions for them," she said. While it is too early to tell what the impact on recovery rates will be for senior lenders, it is hard to imagine that senior lenders will be worse off because they still have tighter security and more control, stated Coates. Focus Wickes executives were unavailable to comment, said a company spokeswoman.