Europes first covenant-light

JPMorgan has been mandated to arrange Europe’s first covenant-light deal with a €1.161bn deal for Dutch yellow pages company World Directories.

The deal sets a precedent in Europe where sponsors are known to have been pushing for covenant light deals for some time.

The €1.161bn deal will refinance existing senior facilities and PIK note with a €1.025bn senior secured facility with incurrence-based covenants and an additional PIK loan facility of up to €136m.

World Directories stable and established cash flow and the loan-to-value ratio, which is understood to be 4.5x through the senior piece, makes it a good candidate to push forward the covenant issue. Sponsors will have looked carefully through existing portfolios before settling on the right candidate to pioneer the issue.

The deal will be modeled on covenant-light deals done in the US and reflects the sponsors desire not only for the increased flexibility the absence of covenants allows but also a desire to move the European market closer to the US model. The deal is being undertaken in the knowledge that not only are sponsors active on both sides of the Atlantic but investors will have already been presented with similar deals through their US operations.

While the covenant-light element is likely to capture headlines, the key motivation for the deal is the desire to reprice the existing facilities, which were put in place in 2004 and included a €400m seven-year amortising term loan A paying 225bp over Euribor, a €287.5m eight-year term loan B at 275bp, a €287.5m nine-year term loan C at 325bp and a €100m seven-year revolver at 225bp.

Sponsors Apax and Cinven are likely to have selected this credit in particular to push forward the covenant light terms because like other refinancing deals it is far more likely to be supported by investors familiar with the credit than a new money deal. Other recent refinancings, notably Numericable, have been used to aggressively drive down pricing margins for the same reason.