Building those books

A slew of deals on which pricing has been decided on a bookbuilding basis in the European leveraged loan market is the latest manifestation of the shift from traditional “private” practices towards a “public market” model that is sweeping the market. Donal O’Donovan reports.

An institutional investor said the loan bookbuild process was “a mirror of the high-yield market. Bookrunners are in effect presenting a deal and saying here’s the price guidance, what price are you prepared to invest at?”

Acknowledging this strong high-yield overlap, JPMorgan‘s head of loan and high-yield debt capital markets, Kristian Orssten, said: “The bookbuild concept can apply to any deal with a high non-bank investor content. The leveraged loan and high-yield investor bases are converging and this execution process is one more step in that direction.”

The trend has developed quickly. In March, bookrunners Deutsche Bank and JPMorgan used a structural flex on the €1.22bn debt package supporting CVC‘s secondary buyout of French freight vehicle hire group Fraikin to introduce a bookbuilt six-year B loan that was priced at 250bp over Euribor from price talk of 225bp to 275bp.

That deal was followed by bookbuild tranches on World Directories and Flint Group, both through JPMorgan, Trader Media through bookrunner JPMorgan and non-physical bookrunner BNP Paribas, and the dual loans/bonds Cognis refinancing, through Goldman Sachs and JPMorgan.

The Cognis deal, which was priced in May, is a particularly telling example of the alignment of the European leveraged loan and high-yield markets – the senior facilities were split between loans and floating-rate notes all priced on the same bookbuild basis and without maintenance covenants.

In fact, of the five bookbuilt senior deals announced, three follow the high-yield practice of having incurrence-only covenants – or are “covenant-light”. All excluding the Flint deal were fully underwritten.

As well as reflecting high-yield practices, much of the impetus for bookbuilding comes on the back of heavy price flexes, which, in effect, produce a kind of slow-motion bookbuilding and have changed the way the loan market processes syndications.

Investors on recent deals – such as the twice flexed TdF – are increasingly not only accepting changes but have in reality also factored the potential for flexing and reordering into their initial responses to deals.

Such repeat flexes are slow and, as JPMorgan’s Orssten said: “Bookbuilding should be more time-efficient and facilitate speedier deal closure.”

That has become a real issue for the market as a whole, to the extent that one investor said that “anything that speeds things up is welcome because flexes just take so much time between commitments going into a deal funding”.

Traditional syndication practices have also led to some tension between bookrunners and investors on deals where multiple underwriters are each under pressure to ensure allocation to multiple investors that then end up with minimal allocations.

Orssten said that bookbuilding went only part of the way to addressing that, saying: “Bookbuild deals have not really slashed the number of investors seeking allocations, but have increased transparency and expectation management, resulting in less investor criticism with allocations and final price points.”

While bookbuilding can speed up syndication and increase transparency, it should have no greater effect on pricing than flexing. Investors, in particular those used to investing in the bond market, seem unfazed by the trend. One significant drawback, however, is the increased risk around placing a physical order.

“Investors need to act decisively and aggressively during the bookbuild, which may result in preferential allocation treatment,” said Orssten.

That is a significant change from loan market practice, whereby they previously simply indicated a willingness to take a certain size at a fixed price point.

Bookbuild loan deals follow covenant-light deals and the erosion of pricing differentials (see box below) in bridging the increasingly narrow divisions between the two markets.

All of these trends are driven by vast liquidity and the rising influence of institutional investors – with institutions happy to invest across the leveraged space and capital structures while bookrunners are tailoring deals to maximise flexibility.