LONDON, March 27 (Reuters) - Private equity firm Cinven has self-arranged €320m of loans backing the buyout of French chemicals group Chryso, as the disintermediation of banks in Europe’s syndicated leveraged loan market notches up a gear, banking sources said.
Cinven announced on Friday it had entered into exclusive negotiations to buy Chryso from LBO France.
The financing will be split between a €270m covenant-lite term loan B and a €50m revolving credit facility, due to be launched to existing lenders and relationship banks this week.
In an unusual move, Cinven has underwritten the financing and will aim to sell the loans without instructing banks, the sources said.
“It is extraordinary and bizarre to do this on an acquisition financing. It is one of the first instances of banks being fully disintermediated on a buyout,” a senior leveraged finance banker said.
Cinven declined to comment.
Banks typically take the lead on syndicated financings for companies owned by private equity firms. Banks underwrite the more lucrative and risky buyout loans and work on a best efforts basis for repricings and refinancings.
Of late, banks have come under pressure due to a pricing squeeze as sponsors reduce what they are willing to pay banks.
There have been a few occasions where sponsors have self-arranged more run of the mill repricings and refinancings including KKR Capital Markets on German Hensoldt, formerly Airbus’ Defence Electronics unit and UK forensic sciences group LGC and Bridgepoint’s refinancing of High street sandwich chain Pret A Manger.
However, Chryso is one of the first occasions a sponsor has self-arranged a buyout financing, according to sources.
“The disintermediation of banks is on the increase generally. The fact that sponsors have time to disintermediate means there is not enough on their plate to keep them busy,” a second senior leveraged finance banker said.
Keeping banks away from a deal can reduce the risk of a pre-emptive bid leaking to the market. The sponsor however will then take on the underwriting risk.
It is easier to underwrite and sell into a hot market, where investors are eager to put money to work. Chryso’s financing is small and the company enjoys a limited but strong investor base, the sources said.
A €270m TLB and a €50m RCF is an increase on Chryso’s existing financing, which includes a €168m TLB and a €40m RCF, offering existing lenders a chance to invest in new paper.
“It can be quite good if a sponsor self arranges a deal as they call friends and family, so you can be sure to get a good allocation and access to scarce paper. You could also get better pricing as a result as there are no banks pushing to get sponsors the best terms,” a senior leveraged finance investor said.
The new financing will also be covenant-lite, unlike the existing financing which has two covenants – interest cover and total net leverage, the sources said.
Some investors have an issue with the company seeking to go covenant-lite as the loan is small and without the backing of a lead bank to create a market in the name, liquidity could be negatively impacted.
“A covenant-lite loan is supposed to be liquid, if this is placed with existing relationships, it is not a liquid loan. Investors are prepared to accept no covenants if they can trade out of a deal they don't like and a lead bank usually makes sure it makes a market to ensure liquidity. Is Cinven going to provide that liquidity?” the first senior banker said.
The investor added: “It is not the most liquid name and liquidity is going to be limited further without a lead bank. People know the deal but it is in a cyclical sector, it is French and it has a slightly chequered history.”
In addition to underwriting loans, banks provide private equity firms with access to undrawn facilities, letters of credit, FX and interest rate swaps as well as providing liquidity to funds, the first senior banker said.
“If the buyout funds disintermediate the banks they will shut themselves off from all that business,” the first banker added.
The disintermediation of banks may lead sponsors to pay up for undrawn facilities. However, in such a hot market where banks are desperate to put money to work, there may not be too much pushback.
“Sponsors will still need undrawn facilities such as revolving credits. Banks usually take a hit on these facilities but with disintermediation, sponsors will have to pay more in fees for the bank lines and pay up for undrawns. However, there is a relationship angle too, so how far do we push,” the second banker said.
LBO France acquired Chryso in October 2014 from French private equity firm Wendel, which split up and sold off parts of its building materials business Materis.
Headquartered in France, Chryso produces additives and admixtures for concrete and cement. It has sales in more than 100 countries and employs around 1,130 people worldwide.
Editing by Alasdair Reilly