As last week drew to a close, three deals were seeking amendments from lenders and investors. Largest of the current batch is German chemicals distributor Brenntag, which was on the verge of wrapping up a €2.448bn amendment and €355.2bn add-on facility through mandated lead arrangers Deutsche Bank, Goldman Sachs and Morgan Stanley.
Commitments on the deal, which backs Brenntag’s secondary buyout by BC Partners, are were due on August 22, although the required level of consent had already been secured before Friday’s approval deadline.
Also in the market is an amendment to UK cereal maker Weetabix’s £617.6m recapitalisation loan, originally syndicated in February this year through mandated lead arranger JPMorgan. That deal takes out the mezzanine debt by adding £65.75m to the B tranche and £15.75m to the C tranche and adds a £100m PIK loan to pay sponsor Lion Capital a dividend.
The third in the current trio of amendments is from Prysmian, the cable manufacturer, which has just received consent on a waiver that allows a prepayment of the €150m of second lien, provides a dividend of €225m and resets the deal’s covenants under the terms of its new financial structure, which adds €450m of new B and C tranche senior debt. Joint bookrunners on that deal are Goldman Sachs, JPMorgan and Lehman Brothers.
These deals bring the summer’s tally of amendments to five. The two other transactions that have sought amendments include poultry products company Aviagen, which sought an amendment to inject additional equity into its structure – an unusual move these days – as part of its US$540m recapitalisation through UBS.
This allowed sponsor Erich Wesjohann to keep the financing non-recourse while allowing prepayment of the mezzanine tranche.
Also, NTL used the amendment route to pack another £300m of bank debt into its overall structure in connection with its acquisition of fellow cable provider Telewest.
That deal, through leads Deutsche Bank, Goldman Sachs, JPMorgan and RBS, allowed the UK cable manufacturer to save on overall interest costs by issuing a much smaller bond – US$550m as opposed to €600m equivalent – as a result of the large oversubscription it achieved on June’s £4.975bn multi-currency debt package.
Such a high concentration of amendments in the market at once has raised eyebrows in some quarters. The last time the technique was used this frequently it was closely followed by a peak in the default cycle, leading some market commentators to view amendments as a bellwether of a turn in the credit cycle.
The logic behind the link is straightforward. “If a deal is weak, sponsors can apply a lot of pressure on lenders to amend the terms,” said one European syndications head. As the credit crunch approaches, the sponsors’ last line of defence is to move the threshold at which the company will breach its covenants, thereby avoiding, or at least delaying, the default.
While the current salvo of amendments may provide further reason for investors to flee the overheating leveraged market, there are other, less insidious reasons for altering the terms of a deal. Each amendment must therefore be assessed on its own merits.
With Brenntag, the leads have been candid about the reasons for the changes. “It is the most efficient way of doing the deal. So many accounts looked at this earlier in the year, they already know the credit,” said one.
The deal is something of a special case, having been recapitalised by former owner Bain Capital in December last year, then returning to market in June with a €390m add-on that enabled it to make a number of acquisitions. As a result, the change of sponsor is the only real point of difference.
“It’s unusual – this would normally trigger the change of control clause, so investors would all be paid back at par. They would have to find something to do with their money for the six weeks or so that it would take to bring them in to the new deal,” said one of the Brenntag leads.
Instead, funds will be paid the equivalent of their call protection on the second-lien and senior tranches, together with an amendment fee on the senior debt. The changes also allow for material changes such as asset sales and various tweaks to the covenants. If last week’s LBO rumours surrounding NTL come to something, it will be interesting to see if that company follows Brenntag’s lead.
The common theme in three of the other four amendments is a function of the market’s high liquidity. Strong demand for the senior debt prompted NTL, Prysmian and Weetabix to save on interest costs by increasing senior debt at the expense of the higher yielding junior tranches. The last of the five, Aviagen, actually improved its credit quality by injecting more equity into the structure.
Although some of the amendments also affected the covenants – notably on Prysmian – their central motivation has more to with strengthening financial profiles than tackling burning platforms.
Moreover, the high volume commercial banks are not seeing a spike in small to medium-sized companies seeking amendments due to pressure meeting their obligations. This fits well with the view that default rates should stay at reasonably low levels, for now at least.
That is not to say that caution can be abandoned. These amendments have been made possible by the market’s readiness to accept higher leverage at every point in the structure – a sure sign that the market is red hot. And with covenants steadily eroded over the past few years, the need to amend terms has been reduced. Subsequently, the link between amendments and approaching distress may no longer be as strong as it once was.