Demand in the Mezzanine market keeps on pumping

Saga and Telewest are the latest issuers to feel the benefit of surging demand for mezzanine finance and growing acceptance of its cousin, second lien loans. Saga’s £250m mezzanine tranche, part of a £1.045bn package for Charterhouse’s buyout of the company, flexed down by 50bp on the senior and junior facilities. Orders were placed to a total of £450m, illustrating the depth of pocket for mezzanine loans and almost equalling AA’s £500m record tranche.

The mezzanine comprised a £250m 10-year warranted tranche, with a cash interest margin of 450bp and a non cash margin of 400bp. Those levels will tighten to 400bp and 350bp.The £75m 10-year junior mezzanine tranche will also tighten by 50bp, giving an overall return of 11%.

The rest of the debt equates to senior tranches, which wrapped up at standard pricing of 225bp, 275bp and 325bp without the need for a general syndication. Some 14 banks joined the deal. According to one source, the result on the mezzanine is doubly significant because AA was backed by an anchor order from a CVC LP. CVC and Permira teamed up on the AA buyout in September.

At the same time, Telewest pushed the boundaries with its second lien loan. The £250m facility is the largest second lien loan in Europe so far. It tightened by 50bp to 400bp over Libor on the back of a strong oversubscription, while the B and C tranches of the £1.8bn refinancing package tightened as well.

The European mezzanine market hit its highest rolling total for more than a year in September, according to research from Mezzanine Management and Initiative Europe. While the buyout market itself remained fairly static in the second and third quarters, mezzanine volumes invested in the first three quarters rose sharply to €4.1bn.

Much of the increase is due to the completion of the £400m mezzanine loan for the acquisition of the AA. That facility is the largest mezzanine deal to date, eclipsing Gala Group’s €400m mezzanine line. Like Saga, it was structured with senior pieces and junior tranches.

Other large buyout financings have also inflated the mezzanine figures. Cinven and Apax’s circa €2bn debt deal for the acquisition of VNU World Directories contributed €100m to the mezzanine pot. The acquisitions of the Odeon/UCI cinema chains in the UK and Keolis in France, added a combined €350m to the market statistics.

A sharp surge in mid-cap transactions was evident through the third quarter. Deals in the €20m to €500m range totaled 28 in the third quarter, up from 17 in the second quarter. Third quarter activity was worth €3.5bn, compared to a value of €2.6bn in the preceding three months.

Renewed activity in the UK was another driver of the growth. The third quarter saw 16 mezzanine deals in the UK, compared with 10 in the second quarter. The UK, including the AA deal, accounted for 40% of mezzanine activity in the third quarter, compared to France’s 36% share, Germany’s 9.5% share and the Benelux region’s 7.6% share.