LONDON, April 17 (LPC) - Leveraged borrowers are having to consider highly bespoke, shorter-dated, more expensive privately placed deals to fulfil their short-term liquidity needs from the likes of direct lenders, hedge funds and even sponsors, as banks put a stop to underwriting due to the Covid-19 pandemic.
Sponsors Cinven, CPPIB and EQT managed to secure a waiver this month from lenders to provide portfolio company Hotelbeds with a €400m loan to fulfil its short-term liquidity needs.
It is highly unusual for sponsors to directly provide debt to a portfolio company. Typically, they inject equity into underperforming companies or raise debt elsewhere, but having assessed all options, the bespoke solution seemed the most attractive route, and avoided having to pay crippling interest rates.
“The sponsors explored all avenues and wanted to make sure the price point they were locking in was sensible and manageable. Going to the institutional market means having to attract incremental term loans at 12%–13%,” a syndicate head said.
By injecting their own money as debt, the sponsors were able to secure more attractive terms, while also earning interest on the cash.
“Putting in equity but sold as virtue of debt and clipping a coupon made sense,” the syndicate head said.
The debt provided Hotelbeds with a quick solution not available from a more traditional bank financing. Banks are unwilling to underwrite leveraged loans and cautious institutional investors are taking far longer to assess opportunities.
“If funds and lenders were let in to do an analysis it would have taken weeks. Sponsors know them best and had capital. It was not a debate – they came in and told people it was necessary and within the time requirement it was really the only option,” a second syndicate head said.
Banks are being inundated with requests for loans from a large number of Single B borrowers but are unwilling to underwrite new financings, fearing there is no clear exit strategy.
“We are having plenty of conversations with companies panicking right now that need liquidity facilities. They are reaching out to relationship banks and asking for another €50m–€100m, but it is impossible to achieve that in the bank market,” the first syndicate head said.
“That creates a situation where we figure out what else we can do.”
That has led banks to try to become brokers for their corporate and sponsor-backed Single B issuers. As such, they are introducing borrowers to alternative forms of capital that meet their liquidity needs.
“The lower end of the rating spectrum is more dependent on finding bespoke solutions and they are targeting hedge funds and direct lenders. They are very bespoke lines we are packaging up on a best-efforts basis,” the first syndicate head said.
Last month, investment firm HPS Investment Partners, formerly known as Highbridge Principal Strategies, provided a £70m single-currency super-senior term loan to troubled restaurant chain Pizza Express.
The deal repaid an existing £20m super-senior revolving credit facility and a £10m super-senior term facility advanced by Hony Capital, both due to mature in August 2020. The rest of the loan will be used to fund general corporate and working capital requirements.
The existing RCF was put in place in 2014 alongside £610m of high-yield bonds to finance Hony’s buyout of the company in 2014.
The new facility is guaranteed by Pizza Express and it will rank senior to the company’s 6.625% senior secured notes due 2021.
The loan pays a margin of 675bp over Libor subject to a 0.75% floor with an OID of 2.5% on the total commitments payable on the closing date of the loan.
“Pizza Express had severe levels of stress where shareholders didn’t have the ability to put in equity, but they are fine taking capital with significant double-digit yields on it,” the first syndicate head said.
The market expects to see several more of these types of transactions.
“There are further situations in the making, as we speak, like Pizza Express,” the first syndicate head said. (Editing by Christopher Mangham)