Rexel structure overcomes concerns about leverage

A tight capital structure and strong liquidity achieved an aggressive deal for Clayton Dubilier & Rice, Eurazeo and Merrill Lynch Private Equity’s purchase of French electronics retailer Rexel.

HSBC, JP Morgan, Merrill Lynch, Morgan Stanley and RBS came up trumps for their clients in the leveraged loan and high-yield bond markets. This was despite high leverage on what some investors dubbed a low margin and cyclical business, as well as a €800m securitisation that will sit at the top of the capital structure.

“In today’s market you do not win any prizes unless your deal is aggressive,” said Simon Parry-Wingfield, who led the financing for Morgan Stanley. “Rexel can sustain high leverage, because it is a cash-generative world leader in its field. It also has a global presence and is enjoying a cyclical up-turn.” He added that, on a capex adjusted basis, leverage was 7.5x, less than for some other recent buyout financings.

The debt financing cleared the market at 5.1x senior leverage on a €1.6bn loan package, rising to a multiple of 6.7x factoring in the €600m high-yield bond. The sponsors also invested €1.6bn in equity, or 38% of the purchase price, in support of the transaction.

The loans went on to recruit an oversubscription from 22 banks and 13 funds, a stronger result on the bank side than another LBO test case, the recent syndication for VNU. The high-yield bond was up to three-times covered and priced in the middle of talk. Plans for a dollar portion were scrapped on strong uptake from European investors.

Market participants that declined the deal were pragmatic about the result. “Everybody was saying that this was a difficult credit and that perhaps it was the one that had gone too far. At the end of the day, they had the buyers. That is today’s market for you,” said a loan investor, who declined the deal.

The leads overcame the concerns with a wide distribution and a capital structure designed to limit expenditure. Rexel is in recovery mode after a period of declining margins due to over-expansion in the late 1990s. It has since sold off extra divisions – margins troughed in 2003 – and plans only small, bolt-on purchases going forward.

The strategy limits amortising debt to €400m, a factor that deterred some institutional investors, who wanted to see more amortisation and faster deleveraging. Some 50% of the €300m term loan B and €300m term loan C were set aside for funds.

“We declined the deal because there was too much leverage on a low-margin business. We felt that the structure did not have enough headroom to accommodate even a small blip on the radar in future,” said one CLO manager.

The prospect of the securitisation was the deal-breaker for another. “We think the sponsors have paid too much for a company with a history of declining sales. The deal cannot withstand the securitisation,” that CLO manager said.

Market participants claimed during syndication that participation from CLOs would be thin overall. In the final analysis, up to eight such accounts were reported to have joined the deal.

Success in the senior debt market came after a wide distribution. Natexis, BNP Paribas, CAI and Calyon stepped up as sub-underwriters ahead of general syndication, which was aimed at around 80 investors.

The €600m bridge loan that also backed the buyout was snapped up by about 12 investors ahead of the high-yield bond. The mainstay of the liquidity was hedge funds earning a quick 650bp over Libor and banking on strong demand to ensure the take-out.

Despite rumours that a couple of hedge funds were looking to place three-figure orders, most of the hedge fund commitments ranged between £20m and £50m. Some banks were denied access to the bridge loan because they were also seeking a role on the bond.

The 10-year, non-call five senior sub notes priced at par for CCC+/Caa1 ratings, with a coupon of 9.375%. This was in the middle of 9.25% to 9.5% price talk, but up from the pro forma yield of 8.875%. The spread is 565bp over the 3.75% 2015 Bund. Traders away from the leads said the notes broke to trade at 100–100.5, but by last Friday the leads were quoting the bid at 101 to 101.5.

There was no need for a dollar tranche, despite roadshows in the US. The rising dollar swap rates would have meant the dollar tranche pricing outside the euro facility at around 10%. The 10-year dollar swap rate was at 4.93% last week, compared with the 10-year euro swap rate at 3.85%.

The bonds were about 2.5 to three-times covered, with Europe’s traditional long-only investors taking up the bulk. Between 20% and 30% of the orders went to hedge funds.

Most investors overlooked the rating because the price was compelling in comparison with the rest of the market. A number of bond investors struggled to get comfortable with the credit, however. Like the loan market, they cited leverage and low margins and extra debt as their main concerns.

In contrast, there was praise for the management team. “The deal was very well marketed and the CEO was impressive. We felt very comfortable with the company’s conservative outlook,” said one London-based fund manager after roadshows.

The loan package comprises a €502m seven-year TLA at 225bp; a €300m eight-year term loan B at 275bp; a €300m nine-year term loan C at 325bp; a €300m seven-year revolver at 225bp; a €200m seven-year acquisition line at 225bp and a pending £800m borrowing base facility.

Sub-underwriting tickets were €75m with a €50m target final hold for 140bp all-in or a €30m take-and-hold ticket for 80bp upfront. Investors are waiting for the loans to break into secondary, where any price below 101 would indicate that some holds were overlong.