Economic, Earnings and Investing - Your money

Trlpc unitranche loans increase presence in europes leveraged market


Dec 22 Bain Capital's record-sized loan backing its acquisition of Irish building materials group CRH's UK concrete and UK and US clay businesses has highlighted that unitranche financing has become more prominent in Europe's leveraged loan market. Unitranche loans, a hybrid of senior and mezzanine loans, are becoming increasingly popular in Europe as an alternative to syndicated bank loans for small and medium-sized companies. Until recently, the size a borrower was able to raise in a unitranche financing was capped at around 150 million euro ($183.89 million) but three deals in December exceeded that, after increased demand from borrowers and lenders."Unitranche loans are getting bigger. The key range at the larger end of the market was anywhere from 30 million euro to 150 million euro and there were not many deals in the 150 million euro range," a direct lender said. Bain's acquisition of the concrete and clay businesses was backed with about 250 million pounds ($390.48 million) of unitranche financing from GSO Capital, the credit platform of Blackstone, making it the largest of its kind in the European market, according to bankers.

Elsewhere, Ares Management and GE Capital said on December 5 they provided a 187 million pounds unitranche financing from their joint venture, the European Senior Secured Loan Programme, to back Montagu Private Equity's buyout of UK software company Open GI. It was the largest unitranche from the 1.75 billion euro ESSLP since its formation in 2012. Macquarie Lending, Tikehau and Hayfin Capital Management announced on December 10 that they had underwritten a unitranche financing for the management buyout of sea salt producers Group Salins. The unitranche was also large and totalled 170 million euro, banking sources said.

PROMINENT ROLE In Europe banks have become increasingly wary of taking on risk and leverage amid volatile macroeconomic conditions and closer scrutiny from regulators. Shadow banking has attempted to capitalise on an opportunity to fill the financing gap and the number and size of funds capable of investing in the space has increased. Last week, private equity firm Ardian provided a 92 million euro unitranche financing to back a buyout of French animal equipment company IMV Technologies by Qualium Investissement, a subsidiary of Caisse des Depots.

"Unitranche loans will get bigger because in that part of the market companies either go for a high-yield bond or a loan and in the syndicated market, banks have backed off a bit mainly due to a significant credit wobble in Europe but also because banks got hung in the market on some difficult deals. There has definitely been an opportunity for private debt funds to come in and take the whole load when financing a business," the direct lender said. A banker added: "More people out there are willing to do large unitranche financings. There is regulatory pressure on banks to limit leverage, so there is a financing space to be filled."Direct lenders are attracted to the returns on offer from unitranche loans which typically range from 7 percent to the low teens. Mezzanine investors are also diversifying and offering unitranche financing, eager to put funds to work after a lack of demand for the mezzanine product. Borrowers are opting for unitranche loans attracted to dealing with one lender rather than a raft of banks. They also minimise market risk dealing with one lender by avoiding a syndication process, which can be expensive if investors demand to be paid higher."If a borrower can find a unitranche lender willing to do a big size loan, and there are a few people out there that will, the borrower takes away market risk. They are probably still paying those direct lenders close to what they would pay an underwriter in fees and they will pay more in interest but they also remove the downside of market risk and having to pay for flex if the deal doesn't sell well," the banker said. ($1 = 0.8157 euros) ($1 = 0.6402 pounds)

Trlpc us leveraged loans struggling to find pricing benchmarks


Jan 15 Leveraged loan pricing is rising in the U.S. as the first big deals of the year including a $2.525 billion buyout loan for retailer Petco Animal Supplies Holdings edge out into a turbulent market. Falling oil prices are dragging equities lower and complicating efforts by embattled banks to sell a multibillion dollar overhang of loans that were delayed from last year. Petco, which is rated B1/B, was chosen to reopen the market and establish a new pricing benchmark due to its strong financials, but pricing on the deal was increased last week and a new $700 million tranche was added with no Libor floor to boost returns for Collateralized Loan Obligation (CLO) funds after the deal received pushback from investors. Pricing on Petco's loan was increased by 25 basis points to 475 basis points over Libor with a 1 percent Libor floor. The no-floor tranche was added to protect returns for CLO investors against high Libor rates and will earn 500 basis points for investors. Petco's pricing is 75 basis points higher than the 400 basis points which competitor PetSmart paid last February on a $4.3 billion loan that backed its buyout by BC Partners. PetSmart later cut the price of the loan to 325 basis points over Libor from 400 basis points in May."Both the loan and bond markets have reasonably decent technicals right now, but the Single B part of the market is really where we are going to see how far things have steepened for new issue," said AJ Murphy, head of Global Leveraged Finance at Bank of America Merrill Lynch.

Investors are demanding higher pricing to compensate for higher risk and illiquidity in highly volatile markets and are focusing intently on selecting strong credits as their best defense against a possible downturn, which is driving market bifurcation. Software company SolarWinds, which also has a B1/B rating, launched a $1.5 billion buyout loan last week that was also held over from last year. The dual-currency loan, which is also rated B1/B, has higher pricing guidance of 500 basis points to 525 basis points over Libor and Euribor with a 1 percent floor and is also being sold in Europe. OVERHANG DILEMMABillions of dollars of U.S. leveraged loans including SolarWinds were put on hold late last year after a $3.3 billion cross-border loan for Veritas was pulled in November due to tough market conditions even after the company widened pricing to 500 basis points over Libor with a 1 percent floor and widened the discount to 95. A $1.35 billion term loan supporting Kraton Polymers' acquisition of Arizona Chemicals and a $575 million credit facility financing OM Group's buyout were also postponed.

Deals for companies that were perceived to be weaker credits, including a $1.5 billion buyout loan for department store Belk were forced to price at steep discounts as average secondary bids plunged. The SMi 100 index of the most actively-traded leveraged loans hit a low of 96.46 on December 18. The index, which is currently trading at 96.56, was trading at par last April. Market conditions have not improved significantly so far this year and persistently low secondary prices and negative macroeconomic developments since the start of the year are making it difficult for banks to underwrite new deals and harder for private equity firms to model pricing and have confidence that committed financing is available.

"The sponsors are not bringing deals right now and seem hesitant until they have a better feel for the market," an investment banker said. Petco and SolarWinds are expected to establish pricing benchmarks and the levels that they set will determine if more of last year's overhanging deals return to the market. Both deals will need to price and trade well for that to happen."If there's an LBO you're going to launch, it's going to be Petco," a second banker said. "It's not a question of do people want to own Petco, it's a sense of where do people want to own it."Investors continue to show a strong preference for highly-rated credits and pricing on two deals has tightened this year as cash-rich investors try to buy loans that they are confident will perform well. Pinnacle Foods sliced pricing on a $550 million term loan rated Ba2/BB+ to 300 basis points over Libor from 350 basis points last week, while fiber network company Zayo cut the price on a $400 million acquisition term loan to 350 basis points over Libor from 375 basis points. Selected lower rated credits have also been able to cut pricing. B1/B-rated contact lense maker 1-800 Contacts tightened spreads on a $500 million buyout loan to 425 basis points over Libor with a step down to 400 basis points over Libor with a 1 percent floor from original guidance of 450 basis points to 475 basis points.