March 5, 2020 / 4:44 PM / a month ago

Leveraged loans cancelled, delayed and reneged as virus hits

LONDON, March 5 (LPC) - The coronavirus has hit Europe’s leveraged loan as opportunistic deals are cancelled, syndications are delayed on underwritten transactions and bankers renegotiate the terms being offering to sponsors on new deals as pricing widens across the board.

All refinancings, repricings and recapitalisations have been pulled prior to launch, putting a halt to deals that have dominated activity in Europe’s leveraged loan market so far this year.

“We have a real issue on our hands right now. Everything that is not completely essential has been pulled. I would imagine that 2020 will be a pretty disrupted year as a result,” a sponsor said.

Bankers are also delaying the selldown of underwritten deals that are yet to launch, hoping the price disruption on deals in syndication will settle down.

A €1.5bn debt financing backing Lonestar’s acquisition of BASF’s construction chemicals business was due to be brought to market in the first week of March. Although some of the loan has been pre-sold, the timetable for syndicating the majority of the term loan has been delayed until there is a clearer sense of where the market is pricing, sources said.

A €520m leveraged loan backing private equity firm Ardian’s acquisition of Cerelia, a French company that makes pizza dough and cookies, was due to launch for syndication in March but that could be postponed too.

Banks are in no hurry to launch an up to €11bn loan and bond financing to back Cinven and Germany’s RAG Foundation’s €17.2bn acquisition of Thyssenkrupp’s elevators division. It was expected to launch in the second quarter but could now come in the third quarter, sources said.

BACK TO THE TABLE

Bankers are in talks with sponsors about renegotiating terms offered on financings to back M&A situations in auction.

“Anything in process will be fixed to market. If we haven’t signed it we will probably amend terms and increase pricing,” a second senior banker said.

Final bids are due on March 13 on a €3bn sale of CapVest’s French nuclear medicine provider Curium. Banks are expected to offer the last remaining bidders Bain, CVC and Nordic Capital different financing terms to what was initially proposed to back their initial bids.

The banks backing the different trees are expected to go to credit committee around March 10 to see whether a renegotiated financing package will be approved.

“You have to react to the market volatility otherwise you’re reckless. How can you not factor into pricing the past 2-3 weeks. There is no way you can craft a story to an investment committee that market will just bounce back,” a syndicate head said.

A number of deals in syndication including chemical group Polynt-Reichhold, private school chain Inspired Education, corporate financial advisor Duff & Phelps and Australia-based cancer and cardiac service provider Genesis Care have all priced wider. Interest margins increased up to 50bp, while OIDs widened to up to 2 points.

A number of investors insist the market has widened by 100bp and won’t do B3 deals priced below 400bp.

“If you are underwriting a deal today you change the terms and play what’s in front of you, which is a dislocated market. You go to credit before a final bid date and the terms might be different from first round bid terms. While it is still very competitive between banks, sponsors will be realistic about what is happening in the market and want a deal that is placed well,” a second syndicate head said.

MORE WIDESPREAD

2020 got off to a good start and with the certainty provided by the UK general election the momentum was there for a strong year.

The coronavirus has impacted that sentiment and while loans with obvious exposure to Asia have softened, the effects are far more widespread as investors fear any borrower with supply chain issues could be impacted by the pandemic.

A quarter of EMEA’s leveraged finance portfolio is exposed to the coronavirus spreading in Europe, Fitch Ratings said in a report on Tuesday.

“So many sectors are affected. There are no airline loans but related borrowers are Swissport and WFS. Luxury goods such as Breitling, hotels like Hotel Beds, travel companies and leisure including Vacalians, Homair, ECG, Stage Entertainment, Merlin, Parques Reunidos, Vue Cinemas and Port Aventura,” a senior investor said.

“Events will be affected impacting Dorna, NEP, Clarion and Comexposium and education could be impacted affecting the likes of Cognita, Galileo and Nord Anglia. Not forgetting gaming, so Stars Group, GVC and catering such as WSH and Vermaat. There is an effect on consumer which impacts Action, THG and chemicals businesses. All will have various affects and to different degrees and the list doesn’t stop there.”

With the market softening, sponsors are reluctant to put portfolio companies up for sale, which is likely to result in a lacklustre pipeline and a lack of financings, until at least the third quarter.

“There are plenty of mature transactions I would like to sell in a high asset priced environment, but would we have discussions around these credit in an ‘uncertainty discount’ environment? No. Not at least for the next 3-6 months. So there is not a huge pipeline of deals and we are trying to bide our time,” the sponsor said.

The first syndicate head added: “There should have been four strong quarters this year but now we’ll be lucky if we get one in the fourth.” (Editing by Christopher Mangham)

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