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Loan investors cautious around Rexel and Demag

Leveraged finance bankers have been playing chicken with the market to guarantee sponsors’ success in auctions. Six times total leverage has been the new five for some time, but more recent deals have stretched the multiple closer to seven times.

Banks and sponsors are well aware of the implications of the trend, and will admit privately that they are nervous. Unofficially, bankers are hoping that the market will self-correct before a major syndication goes badly wrong. Moves in this direction will be driven ultimately by investors, as no arranger can be seen to be too cautious with so many banks competing for mandates.

There were many, subsequently unfounded, disaster predictions about last year’s buyout financings for Saga and VNU. The eventual results were a vindication for the arrangers, but they also served to exacerbate concerns about creeping leverage. The stakes are higher for all concerned this year because, with so many private equity firms on the fundraising trail, the level of risk will extend as the deals increase in number.

So it is not a complete surprise that the market seems to be showing signs of caution if not outright resistance. CD&R, Eurazeo and Merrill Lynch Private Equity’s €1.502bn loan for the €3.7bn buyout of Rexel is under the spotlight on account of leverage and credit quality. The recapitalisation deal for Demag is also a source of consternation because KKR is extracting a dividend and levering the company back up.

The Rexel loan is getting a rough ride through general syndication. Quite a few banks declined to join via mandated lead arrangers HSBC, JP Morgan, Merrill Lynch, Morgan Stanley and RBS. Syndication follows a senior phase late last year in which BNP Paribas, CIC-Credit Mutuel, Ixis and Natexis Banques Populaires joined at the top tier.

Criticisms of the deal are that sponsors paid too much and have over-leveraged the company, which bankers said operated on margins that many considered too low for this level of debt. An arranger acknowledged that Rexel was not the easiest credit to sell and admitted that not all banks would be able to get comfortable with the credit. They remained confident, however, that the deal would get done as they had cast their net wide and approached a large number of banks and funds.

French banks will presumably take a large chunk of the retail debt in this phase – even though some big French names are rumoured to have declined joining in the senior phase.

Demag Investment’s €940m recapitalisation has received a mixed response since launching two weeks ago, meanwhile. A small number of participants in the original deal are known to have dropped out of the new facility. One banker who is not participating this time round said they felt Demag’s four constituent businesses represented a weaker overall credit than the original seven.