(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Quentin Webb
LONDON, Dec 1 (Reuters Breakingviews) - Once again, banks in
Europe have been left standing when the music stopped. In an
echo of 2008, lenders backing private equity deals have found
themselves with a big backlog of unsold loans. That bodes ill
for future buyouts.
Private-equity deals are usually financed by a handful of
banks, which tide the borrower over until it can arrange
permanent financing in the form of “senior” loans and riskier
instruments such as high-yield bonds. But numerous banks,
including Goldman Sachs (GS.N) and Morgan Stanley (MS.N), were
wrong-footed by the rapid escalation of the euro crisis. Lenders
suddenly found there were few takers for the loans they wanted
to syndicate, while the market for new junk bonds effectively
Eleven European buyouts remain “hung” in this way, with
total debt of nearly 5.2 billion euros, Thomson Reuters LPC data
shows. That’s a fraction of the 80-billion-euro mountain that
banks were left with four years ago. And it’s halved since
August, as banks have pulled out the stops to shift deals.
But managing the backlog hasn’t been easy. Banks have
increased interest rates to make the loans more attractive to
buyers, and sold them on for as little as 91 percent of face
value. Debt packages have been rejigged to reduce cash interest
payments, or to replace junk bonds with costlier mezzanine
In financial terms, the absolute hit looks modest for banks.
So-called “flex” clauses allow them to pass on perhaps 1.5
percentage points of extra interest costs to the borrower. And
underwriting fees, equivalent to maybe 3-4 percent of the
financing package, effectively provide a cushion that can be
absorbed before banks have to recognise a loss.
Still, banks are forced to set aside large chunks of scarce
capital against the loans on their balance sheets. And writing
off fees still hurts, particularly when the investment banking
industry is suffering.
The consequence is that buyout loans will become scarcer and
more costly. Lenders might restrict debt ratios in new deals.
Banks may say “no” to more deals -- or at least build in more
leeway in case things go wrong. When the music starts again, the
dance floor will be less crowded.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
-- Banks are holding about 5.2 billion euros of “hung”
bridge and senior loans, according to November data from Thomson
Reuters Loan Pricing Corp (LPC).
-- The biggest is a 921 million-euro bridge loan backing the
buyout of Swedish alarm firm Securitas Direct, arranged by six
banks: Bank of America, Goldman Sachs, HSBC, Morgan Stanley,
Nomura and Nordea.
-- Efforts to clear the backlog have produced some unusual
results, such as private equity firm BC Partners buying the
riskiest slice of debt backing its own buyout of Com Hem, a
Swedish cable company.
-- An index of 40 European leveraged loans was trading at
89.98 percent of face value as of Nov. 25, giving the loans an
average yield of 8.74 percent, LPC data show. The index has
declined from 97.99 percent of face value six months ago.
-- IFR story: Banks step up sale of leveraged loans
-- IFR story: BC Partners puts more cash into Com Hem-
(Editing by Peter Thal Larsen and David Evans)
Keywords: BREAKINGVIEWS BUYOUTS/
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