October 8, 2019 / 9:07 AM / 8 days ago

Investors pay to play in Europe's overheated loan market

LONDON, Oct 8 (LPC) - Two leveraged loans have priced over par in an unusual move for the European market, as strong appetite for paper and low deal flow demands investors pay up to lend on hotly contested deals.

Investors paid 25bp to join add-on loans for French private hospital group Vivalto Sante and Belgian telecom Telenet, after they were flexed tighter during syndication to price at 100.25 - called a negative original issue discount.

ANOIDs have been seen on a handful of loans over the past few years but have gained momentum due to overheated lending conditions.

The ANOIDs are specifically on add-on loans, where demand is off the charts and arranging banks are unable to alter interest margins so are turning to OIDs to reduce oversubscribed books.

“The only way that makes sense to do an add-on to a deal that is well priced versus the rest of the market and trading above par is with an ANOID. They are rare but not surprising in this market,” a capital markets head said.

Vivalto Sante’s €120m add-on loan was over six times subscribed, receiving orders of around €750m, prompting lenders to revise the OID to 100.25 from 99.5-par. The move to ANOID resulted in the commitment book being halved.

Telenet’s €175m add-on term loan followed suit and priced at 100.25 OID.

Investors used to getting a discount on loans or at worst accepting a loan issued at par are increasingly frustrated.

“A negative OID is disappointing but there is such strong demand,” a senior investor said.

While some investors keen to put money to work are accepting the move, many have reduced ticket sizes and others have protested against the aggressive tactic by withdrawing their commitments altogether.

“Some people are walking away, some are reducing orders, some are staying the same,” a second senior banker said.

LEADING THE WAY

Although many loans trade over par after allocating as demand for deals continues to outstrip supply, few allocate over face value. In 2017, a €117m-equivalent add-on loan for security software company Avast was the first European deal to do so when it priced at 100.5.

A handful have done so since then. In November 2018, French engineering company Socotec issued a €75m add-on loan at 100.25, up from par. The same month, French laboratory group Biogroup LCD completed a €178.2m add-on at 100.25.

Chemicals firm Azelis issued a €100m incremental loan at 100.25 in March and UK veterinary care provider IVC priced a loan at 100.25 in August.

Despite paying up for the paper, 100.25 is still a discount to where the secondary market was prior to the add-ons. Vivalto and Telenet were both quoted around 100.75 before the add-ons were launched.

“In effect it could be argued that investors are receiving a 50bp discount, despite paying over par for the paper. You can turn down a deal on principle to avoid paying over par in primary, only to end up paying more for it on secondary. It can be a wasted protest,” the investor said. (Editing by Christopher Mangham)

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