Sentiment improves but no recovery yet

The tone in the European leveraged finance market was stronger last week, though the market has yet to be tested by a buyout of size.

Activity in the secondary market also reflected the slow return of confidence, with several flow names trading up throughout the week. However, all participants agreed that it remains far too early to declare a recovery with volumes still very thin and considerable scepticism as to whether investor claims that they are open for business will be backed up by actual cash.

Talk that syndication of the senior debt pieces of Alliance Boots‘s £9.02bn buyout package would be formally held off until February next year were greeted with a firm “no comment” from the lead banking group. Indeed, with what activity there is in the European market rooted in the middle market, the consensus is that the chance of bringing a multi-billion dollar buyout package of this size to market before the new year is remote. As such, any formal confirmation that a deal of that size is not coming to the market would be a statement of the obvious.

With the major deal overhang still casting a shadow in the US, despite the expectation that TXU and ServiceMaster will come out next week, the progress in chipping away at long positions in that market by the piece-by-piece sell down approach is seen as positive. As yet there is no sign of banks taking the same stance in Europe, with the continent’s large banks so far holding steady, reflecting both the smaller size of the overhang and its diversification across a larger number of banks. In addition, arrangers and investors are closely watching the attitude of the US investment banks ahead of their year-end in November for signs of large scale sell-offs specifically in regard to their US long positions.

That is not to say European arrangers are sitting on their hands. Several larger deals are expected to be restructured with new PIK notes to make them more palatable for bank buyers. And while syndications so far remain relatively modest and regionally focused, billion-plus syndications from both BTC and Telenet could be brought to market soon.

There are also definite launches in the market. MLA and bookrunner ING launched a €295m package supporting Alpha Private Equity‘s buyout of Rhiag Group from CVC. The deal closed in August and general syndication follows a JLA phase with Natixis, GE and IKB all joining.

Senior debt is split between a €75m term loan paying 225bp over Libor, a €75m eight-year term loan B at 275bp, a €75m term loan C at 325bp and a €20m revolver. In addition there is a €10m second-lien piece paying 500bp and a €40m mezzanine tranche already placed with Mezzanove and VerCapital. An investors’ meeting is scheduled for October 23.

In the UK the £260m loan backing the buyout of HSS, the UK tool hire business, by Och-Ziff has also launched through MLAs Barclays and SG. Debt is split between a £90m eight-year term loan B priced at 275bp, a £90m nine-year term loan C at 325bp, a £40m seven-year capex line at 225bp, a £20m seven-year revolver at 225bp and a 9-1/2 year £20m second-lien piece priced at 525bp. Lenders are invited to join on tickets of £20m earning 150bp or £15m paying 125bp.

The leverage is 4.3x in total and 3.9x on the senior debt. HSS is being sold by 3i for around £300m.

Also in the UK, Nomura as MLA and bookrunner with Landsbanki as MLA closed oversubscribed the £175m senior and subordinated debt package to support Hutton Collins‘s buy-out of Healthcare at Home.

Senior debt was split between a £45m eight-year term loan B priced at 275bp over Libor, a £45m nine-year term loan C at 325bp and a £25m seven-year revolver at 225bp. In addition there is a £15m 9-1/2 year second-lien at 500bp, a £15m 10-year mezzanine piece at 400bp cash and 500bp PIK and a £30m PIK.

Leverage was set at 5.1x senior rising to 6x through the second-lien and up to 6.9x through the mezzanine.

New mandates remain thin on the group, but RBS is to arrange the debt supporting the US$1.7bn buyout of Samsonite. Elsewhere, Eurazeo confirmed BNP Paribas as MLA on its €2.3bn buyout of Elis from PAI. The deal was agreed in August and completed last week with a €1.85bn debt quantum. Moving over the border to Belgium, BNP Paribas and Natixis were both named as MLAs on the buyout of engineer Duserco.

David Cox