Mezzanine Debt Provider of the Year 2

Goldman Sachs stood out in the mezzanine space in 2006 by working on some very difficult deals. One of the highlights was leading the syndication of the secondary buyout of Swedish TV operator Com Hem, which was sold by Nordic buyouts house EQT to Providence and Carlyle for around US$1.2bn.

In March, the mezzanine was reported to pay 950bp over Euribor and was pre-placed with four hedge funds. It is a good thing they did because a string of large cable deals came to the market including KBW, KDG, NTL, Unity Media and UPC. With the usual suspects fully allocated, Goldman Sachs did well to exploit new liquidity sources such as hedge funds.

Initial talks also indicated that the leverage on the deal could be a precipitous 9x net debt to EBITDA, though that number was understood to be shrinking to 6x within a year. People familiar with the matter indicated that the figure was tempered by the fact that a contractual EBITDA figure was used to structure the deal and Com Hem had a number of guaranteed income sources. Moreover, sources at the time indicated a tie-up with UPC Sweden was planned, which would also affect the final structure.

Goldman was also a lead and major mezzanine underwriter on the Cinven and Warburg Pincus LBO of the combined Dutch cable assets of Casema, Multikabel and Essent Kabelcom. Goldman Sachs, Credit Suisse, ABN AMRO, ING and Morgan Stanley issued a €4.35bn debt package with a €1bn mezzanine piece. This tranche far exceeded the previous record of £460m in mezzanine seen on the 2005 LBO of gaming group Gala and it was the first time that Europe had seen a €1bn piece of mezzanine debt. Utilising this tranche made sense for the banks as the high-yield market absorbed a wave of cable sector deals in 2006. Many of the traditional liquidity sources for this sector may therefore have been at or nearing limits, which would have probably translated into upward pressure on the deal’s pricing had Cinven and Warburg Pincus chosen the bond route. Although the mezzanine market was untested at this level, oversubscription on other deals suggested that the market was sufficiently liquid to absorb the deal.

The deal closed in October 2006 with heavy oversubscription. Initial indications were that the funded part of the senior carve-out was around five times covered, while the unfunded element was around three times covered despite there being no commitment fee. Thirteen banks committed to the pro rata, which means that there were no refusals and the mezzanine tranche was also heavily oversubscribed. The result was good news for the leads, which were tasked with persuading investors to commit to the deal despite the fact that the Essent acquisition had not yet completed.

Investors were told to trade up to a €2m minimum hold level, despite receiving only half that amount in primary syndication. The heavy oversubscription meant that the bookrunners were forced to make withering scalebacks as part of a difficult allocation process. The difficulty was compounded by sponsors Cinven and Warburg Pincus, which imposed the minimum hold requirement as they were uncomfortable with Casema’s debt being held by such a broad spread of accounts. Those investors failing to reach a €2m hold by December faced having their allocations cancelled, giving them the choice of sourcing the extra supply in the secondary market, or selling their existing lot for an early profit. The risk of making a loss through the deal trading down was removed by the leads’ offer to buy allocations back at par. The leads were always clear on the size of the fund allocation and allocated the full 60%. Moreover, the leads pointed out that the strong support at the underwriting stage further reduced the banks’ hold levels and that banks are holding the pro rata elements of the structure. In hindsight, it may be unfair to say that the leads were mistaken in going as wide as they did in syndication – around 200 accounts are thought to have been approached. In their defence, the main comparable for this deal was Numericable, which struggled in primary.

Despite a few hiccups with the Casema allocations Goldman Sachs have demonstrated that they can not only handle complicated mezzanine deals but also enormous ones and for that we salute them as the EVCJ Mezzanine Debt Provider of the Year.