Sponsors hit leverage brakes

After all the drama, Saga and VNU emerged with lower leverage than the doom-and-gloom pundits had been predicting. Is a new sense of conservatism taking root in the red-hot debt markets? For all the talk of leverage approaching 8x, there was tangible pushback from private equity buyers against the more aggressive bids. Firms are concerned about deleveraging scenarios and competition for assets is inflating valuations.

“We welcome a liquid leveraged finance market, but we are being prudent with regard to our own acquisitions,” said Johannes Huth, managing director at KKR in London. “We see the advantages of the trend, but we are selective in applying it to our own business.”

Huth’s comments found common refrain among the sponsor community. “Everybody is waiting for the first person to make a mistake. You have to recognise the buyouts business is not without its risk and apply leverage carefully,” said Ian Taylor, head of the UK business at ABN AMRO Capital.

The general message of caution seems to be getting through, albeit modestly. Debt facilities for Apax and Cinven’s takeover of VNU World Directories came out below 7x. The pair acquired the Dutch information and media business for €2.075bn in September backed by debt from JP Morgan, Bank of America,CSFB and Goldman Sachs.

The initial multiple was a welcome curb for the market, which had been expecting leverage of around 7.5x on one of Europe’s weaker directory publishing assets. During the auction, process bids had been placed as wide as 8x. The facility is expected as 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.

There will also be a €470m high-yield bond. The remainder of the debt will consist of either a €150m zero-coupon bond or €100m of PIK notes. Should the PIK note route be taken, Cinven and Apax will provide the €50m differential as equity.

The £1.045bn loan for Charterhouse’s £1.35bn buyout of Saga was a similar story a week earlier. Leverage had also been rumoured as high as 7.5x, but debuted a whole turn tighter, rising to 6.9x factoring in capital expenditure.

“The market was pleasantly surprised that leverage [on Saga] was so much lower than rumoured; there was definitely a fair degree of speculation in certain areas that we were significantly in excess of 7.5x,” said Ian Gilday, head of European Leveraged Capital Markets at Merrill Lynch.

Bank of Scotland, Lehman and Merrill are the arrangers on the deal. Charterhouse also made the largest single investment in the firm’s 70-year history to back the deal.