LONDON, Oct 18 (Reuters) - Cross border leveraged loans that comprise euro-denominated facilities and US dollar-denominated facilities are seeing the euros price cheaper than the dollars, as borrowers take advantage of the abundant liquidity on offer in the European market.
Recent cross border financings for companies including French telecoms group SFR and global specialty chemicals maker Platform Specialty Products, which priced the euros inside of the dollars despite launching at the same levels, also increased the size of their euro tranches at the expense of the dollars during syndication.
“This is a function of liquidity. There are negative rates in Europe and low yields, which is in part driving CLO issuance and managed accounts. If there is liquidity you have to find a home for it as you are not paid for holding it. It is hardly surprising there is more demand for euros in the leveraged loan market and euros are coming in cheaper than dollars,” a banker said.
SFR increased the euro portion of its 2.3bn-equivalent term loans by 200m to 700m and tightened pricing to 300bp over Euribor with a 0.75% floor at par, from original pricing of 300bp-325bp with a 0.75% floor at 99.75 OID. The dollar term loan priced at 325bp over Libor, with a 0.75% floor at 99.75 OID.
Platform increased the euro portion by 150m to 433m and tightened pricing to pay 375bp over Euribor with a 1% floor and a 99.75 OID, while the dollar tranche was reduced to US$1.475bn and paid 400bp over Libor with a 1% floor and a 99.5 OID.
Investors have accepted more aggressive terms on refinancings and repricings in a bid to avoid repayments, but borrowers are also getting away with tighter terms for euro loans during new money raisings, as investors clamber to put new money to work.
German packaging company Klockner Pentaplast opted to raise more euros with an 85m add-on term loan, alongside a refinancing of its dual-currency term loans. The euro loans tightened inside of the dollars during syndication.
Israeli furniture maker Keter Group dropped a dollar tranche to pursue a euro-only syndication of its 790m financing backing its buyout by BC Partners and PSP Investments, following very strong European demand.
“The European market remains strong. Some wind has been taken out of the US market due to increased deal flow,” a second banker said. “Europe hasn’t had the same deal flow, which has been exacerbated by repricings. New loan flow is cat nip to investors.”
While the demand for paper in Europe has prompted a change to more aggressive terms for the euro loans during syndication, some cross border deals are now deciding to launch with a pricing differential.
Global tea and coffee company Jacobs Douwe Egberts is raising a 1.1bn term loan and US$903m term loan to partially repay existing debt. Pricing on the euro portion is guided at 250bp-275bp over Euribor while the US dollar tranche is expected to price at 275bp. Both are offered with 0.75% floor and 99.875 OID.
“This is simple supply and demand. We are back to 2007 levels on some deals,” the first banker said.
Some investors and bankers are questioning the sustainability of the pricing situation in Europe.
“This is a short term phenomena. There are a number of CLOs on stream and not a lot of product so Europe is tighter than the US and borrowers can get away with that for now but it is a limited window as assets are not priced where CLOs can love them. Warehouses can do anything, but longer term they are creating a problem for themselves,” an investor said. (Editing by Christopher Mangham)