European Bond Market Open For Business

The only item on the agenda was the expiration of the company’s €80 million ($107 million) senior secured credit facility at the end of the following year. The credit facility comprised a €55 million term loan for add-on acquisitions, a €15 million capex loan and a €10 million loan for working capital purposes.

While the company was doing moderately well, the financial crisis had taken its toll on the business. Financial covenants had been too ambitious and we had to maneuver the company through three covenant breaches. With a below-market margin of three-month EURIBOR plus 200 bps, it was clear the banks would want a significant increase in interest if they wanted to renew at all. Basel III with its increased equity requirements was about to be implemented and banks needed to become more selective in their lending.

Had we considered bonds in our preparation for meeting the CFO to discuss the company’s debt? We did, but all outside advisers had initially agreed that the company wasn’t mature enough yet to access the capital markets. As the company was largely family-owned, without an official rating and with no assets available as collateral, one would have to offer at least 7 percent interest.

But we recognized it was the right approach to reconsider, and the company successfully launched a €40 million bond. The CFO had described the company’s strategy for future growth based on various new products and carefully planned add-on acquisitions.

This scenario of bond issuances for refinancing and general corporate purposes is one aspect of the renaissance in the European bond market. Another one, of course, is strategic M&A and LBOs. Last year kicked off with three senior unsecured bonds by Fresenius Medical Care to finance the acquisition of Liberty, followed by a 9.75 percent, $400 million senior secured high yield bond by Taminco to finance Apollo Global Management’s acquisition of Taminco from CVC Partners for  €1.1 billion.

Since then, European investors have been chasing yield in the bond game. While total European leveraged loan volume in 2012 was slightly down from 2011 due to the Eurozone stability crisis, the number of bonds used for LBOs was up. On February 12, 2013, European high-yield bond volumes had reached a year-to-date record with volume at $16.4 billion through 33 deals.

Now, which operative, financial and legal aspects must management keep in mind to successfully issue a corporate bond?

• Smaller or mid-sized companies will not have any capital markets experience unless they already issued a bond or have even done an IPO. Consequently, the company will need outside financial and legal advice to structure the right bond product.
• Obviously, the most relevant factor impacting the interest rate on the bond is past and projected performance of the issuer. While there are many metrics to measure performance, from current financial data like EBITDA, leverage multiples or debt-to-equity-ratios, there is nothing more powerful than a favorable rating from a recognized rating agency.
• The work stream for a bond issuance depends on two things: first, whether the company needs to prepare a prospectus in addition to the indenture, and second, how the placement shall occur. Content and form of the prospectus must be in accordance with the EU Prospectus Directive (809/2004) and the member states’ laws implementing the EU Prospectus Regulation (2003/71). In case of a private placement or certain exemptions, no prospectus is required and the indenture is sufficient.
• It is vital for the success of a bond issuance that the company seeks assistance from professional placement agents. Underwriting from investment banks will usually not occur below a total nominal value of €30 million.

Our travel and tourism company did not make all these mistakes, and its offering ended up being oversubscribed. This reflects the current state of the Euro, and especially of a German bond market that s probably the hottest market since the dot-com and information technology boom in the year 2000 as leading German business paper Handelsblatt noted.

Companies di need to be aware there can be negatives of bonds like higher redemption premiums, difficulties in obtaining amendments or waivers and collective action instruments to the benefit of bondholders.

And, needless to say, there is the danger it all becomes a speculative bubble.

Michael H. Meissner is a national partner at law firm Dechert LLP