May 8 Sponsors are pressing for more aggressive terms on European leveraged loans, taking advantage of changing market conditions to force though concessions to documents during repricings. German ceramics company CeramTec kicked off the recent repricing wave in Europe in April, managing to shave 50 basis points (bp) off a euro term loan to 325bp over Euribor with a 1 percent floor. While investors agreed CeramTec's pricing was tight, 100 percent of lenders opted to retain their exposure in the credit, accepting that pricing has tightened in a market plagued by plentiful liquidity and few deals. With a bleak LBO pipeline, repricings are expected to continue and are likely to seek even more aggressive terms. The most recent repricing for CVC Capital Partners' French rail equipment maker Delachaux also loosened restrictions on dividend payments as well as lowering spreads."If you are a sponsor or sponsor's lawyer, you would be thinking now, while you are doing a repricing, why not just do a bit more?" a loan banker said. Delachaux revised its repricing and tightened terms after strong support for the deal. The euro tranche, which was increased by 70 million euros ($78.51 million) to 405 million euros, will be cut by 50bp to 375bp over Euribor at par from initial guidance of 400bp.
The dollar tranche, which was decreased by 70 million euros-equivalent to $250 million, will be reduced by 75bp to 350bp over Libor, the tighter end of initial guidance. The dollar tranche is offered at par, with a 1 percent floor and reinstated 101 soft call protection for six months. In addition, the ability to take dividends was loosened to enable a payment if leverage is 5.0 times, up from 4.25 times. The deal was initially looking to loosen it to 4.75 times. In addition to cutting pricing and loosening dividend language, sponsors are trying to strip out covenants and make it easier to raise additional debt and make acquisitions, in a bid to try and bring debt on existing portfolio companies in line with new deals they can arrange in the market."There has been a resetting of Europe's leveraged loan market. The adjusted terms on dividends and covenants among other things are what you would get if you raise a new deal right now, so why not ask for them on an existing deal?" a second loan banker said.
GET IT WHILE YOU CAN Borrowers are maximising the window of opportunity as new deals appear few and far between and potential repricings are predicted for a number of companies including German packaging group Mauser, which was sold to private equity firm Clayton Dubilier & Rice last year, and Luxembourg-based ink and pigment firm Flint, which was acquired by Koch Industries and Goldman Sachs' private equity last year.
Some bankers are even approaching borrowers and pitching to reprice leveraged loans raised earlier this year."If a credit is doing really well, there is no way it should be paying 450bp with so much liquidity and so little deal flow," a third loan banker said. Lenders that were in the market pre-2007 are raising concerns over what they see as a potential return to more risky practises on some leveraged deals."Some feel we are back in a situation like pre-2007 and it is even more alarming because documentation is much weaker than it was back then. It is rubbish when people say banks' credit acumen has been heightened by what they experienced pre-2007 as we are back at it. It is quite depressing, history is repeating itself," the third banker said. Once some new deals come to the market, borrowers are likely to stop focusing on repricings, something which will come as a relief to bankers, which make very little fees on these deals and are unpopular among fund managers."A borrower will look to get whatever they can get, but at some point the market will start saying no to repricings and document changes," the first loan banker said. ($1 = 0.8917 euros)