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Lpc sponsors force aggressive terms in europes lev loan market


Nov 10 European leveraged loans are becoming increasingly aggressive as sponsors push for looser bond style docs on deals, unwelcomed but accepted by cash-rich investors desperate to keep money at play amid diminishing supply. While covenant-lite is a well established feature of Europe's leveraged loan market, other elements of bond documentation are now migrating across. Portability, freebie baskets and greater ability to take dividends and make acquisitions are all now regularly appearing in Europe. While they first made an appearance in the US loan market and slowly cropped up on cross-border deals and large European loans earlier in the year, much has filtered down to loans of a smaller size and scope."The erosion of document protection originally appeared on very large transatlantic deals and is now increasingly being seen on sole European deals, of late migrating from the larger to the smaller ones. Most investors think it is inappropriate but the competitive dynamic is such that it is sneaking through," a syndicate head said. Recent financings for deals including Education publisher Inifitas, Spanish telecoms company Ufinet, German HR software firm Personal & Informatik and Finnish paper and packaging group Powerflute were highlighted as aggressive smaller deals by investors. One of the most hard-lined measures being pushed through by sponsors is the ability to add an extra turn of leverage as soon as a deal is closed, without having to show things like improved performance or deleveraging. While all these features are being seen more regularly on increasingly smaller deal sizes, sponsors are demanding more each time.

"In all of the deals the basket are being stretched, and each time they are being stretched a little bit more," a banker said. Sponsors are also getting more freedom on some deals, with majority consent dropping to 50.1% as opposed to the two-thirds traditionally seen in Europe's leveraged loan market. The aggressive terms are difficult for investors to digest, notwithstanding the fact they are being offered in conjunction with higher leverage and tighter pricing.

Senior levels of leverage regularly hit 5.0-5.5 times and bankers are working on deals with total leverage of 6.5-7.0 times. A pricing squeeze means margins, floors and OIDs are unable to compensate for the higher risk, given the flood of cheap money available from new CLOs, credit funds and growing bank appetite for term loans."This is very reminiscent of 2006-2007. Any aggressive doc feature in isolation is not reason enough to turn down a deal but together with high leverage and low pricing is hard. It is a borrowers market right now," an investor said. TROUBLE AHEAD

A lot of the aggressive features are appearing on European deals of varying sizes, irrespective of credit quality. They are being pushed through by sponsors facilitated by lawyers and accepted by bankers desperate for fees. There has been an erosion of credit story as banks and investors battle for deal flow. Loans are being negotiated on the basis of precedent, without looking at what is appropriate for each individual credit, a banker said."Based on docs, leverage and pricing you would think you are about to do a US$2bn solid, liquid loan but in reality it is a tiny, illiquid European deal," the syndicate head said."The most aggressive terms are being cherry picked from the largest US deals which are being pushed onto European banks and investors that don't have the discipline to pushback. Consequently you are getting some deals done with inappropriate terms."Some deals have experienced some pushback, albeit pretty minor. A 240m term loan B for Powerflute closed on November 8 at 500bp, with a 0% floor, the wider end of 475bp-500bp guidance. Prior to close, the OID widened to 98.5 from 99, 101 soft call was extended to 12 months from six months and there were a number of "lender friendly changes to the covenant package." Nevertheless, the loan still allocated and remained covenant-lite.

Mideast money islamic finance down, not out in post mursi egypt


* Islamic finance loses powerful political backing* Potential demand among population still there* Egypt increasingly reliant on Gulf economic ties* Officials do not rule out sovereign sukuk issue* Bankers see no impact on business since JulyBy Ahmed Lotfy and Andrew TorchiaCAIRO/DUBAI, Sept 1 With the fall of the Muslim Brotherhood, Islamic finance has lost strong political support in the most populous Arab nation. But economic pressures mean the industry remains likely to grow and the country will eventually start issuing Islamic bonds. Islamic finance, which obeys religious principles such as a ban on interest payments, was neglected and even discouraged by authorities for ideological reasons in the three decades before the revolution which ousted President Hosni Mubarak in 2011. The market share of Islamic banks in Egypt is only about 5 percent, well below estimates of roughly 25 percent in the developed Arab economies of the Gulf. That seemed about to change when Islamist President Mohamed Mursi, a member of the Muslim Brotherhood, took power in June 2012. The Brotherhood made expanding Islamic finance one of its top economic policy planks, promising to issue sovereign sukuk, introduce rules to facilitate Islamic fund-raising by companies, and reform the operations of Islamic endowments. This political backing has disappeared with the ouster of Mursi in an army-backed uprising in early July; the interim government which is to serve until elections early next year has much less fondness for Islamic finance. But underlying demand among Egypt's mostly Muslim population of 84 million, the country's need to develop what financing sources it can, and the growing role of wealthy Arab countries in the Egyptian economy mean the sector may still grow.

"Sukuk will be available in Egypt particularly because they are the sole instrument used by some investors in the Gulf Cooperation Council and southeast Asia," Sherif Sami, the new head of the Egyptian Financial Supervisory Authority, told Reuters last week. Sami stressed his body would only handle the technical side of sukuk issues, and any decision to push forward with legal changes to facilitate sukuk would be political. DEMAND The technocrats who dominate Egypt's new economic policy team, many of them with experience from the Mubarak era, have shown little personal interest in Islamic finance.

The image of political Islam has been severely damaged in the eyes of many Egyptians by Mursi's troubled year in office and his weak management of the economy. But long-term demand for Islamic financial services has not necessarily changed. Only around 10 or 15 percent of Egyptians use formal banking services, analysts estimate; this implies great potential for growth in both conventional and Islamic finance, and sharia-compliant banking could be a way to draw many people into the formal financial system. Abdel Rahman Al Kafrawi, head of Islamic transactions at Principal Bank for Development and Agricultural Credit (PBDAC), said he had noticed no negative impact since July on business at the 18 PBDAC branches offering Islamic finance. The state-run bank, which caters to Egyptian farmers, launched sharia-compliant retail banking earlier this year, setting aside an initial 50 million Egyptian pounds ($7.1 million) to provide financing for the purchase of durable goods, agricultural equipment and education fees."Such needs never cease to exist regardless of politics or macroeconomics, and hence no negative impact has been felt or is expected," he said.

SUKUK Mursi's government fought a six-month battle to pass a law clearing the way for sovereign sukuk issues, overcoming a bitter controversy over the use of state-owned assets to back sukuk. Officials then talked of Egypt making a debut international issue of Islamic bonds this year, and of raising $10 billion a year by selling sukuk. Such hopes always looked too optimistic, and because it will take time to make technical preparations and restore political stability, a sovereign sukuk sale may not be possible before late next year. But that does not mean future Egyptian governments will abandon the idea. In the past year, governments and companies in the Gulf and Turkey have stepped up sukuk issues, tapping large pools of Islamic funds whose demand for sharia-compliant instruments has exceeded supply. To help replenish its foreign exchange reserves and bridge its huge state budget deficit, Egypt will remain under strong pressure to follow suit - especially since the Gulf has become increasingly important to the Egyptian economy. Saudi Arabia, the United Arab Emirates and Kuwait have become Egypt's main financial backers since Mursi was deposed, pledging $12 billion in aid. Any revival of foreign investment in Egypt is expected to depend heavily on the Gulf. Finance Minister Ahmed Galal told reporters last month that the interim government had no problems in principle with using sukuk, but would not make them its principal instrument. While post-Mursi governments are likely to promote Islamic finance less aggressively than the Muslim Brotherhood, they may regulate it more efficiently - most types of economic policy-making under Mursi were marred by political bickering and bureaucratic logjams. So in the long term, Islamic finance may develop in a more healthy environment. Shahinaz Rashad, executive director of the Cairo-based Metropolitan Training Academy, which offers training to personnel at Islamic financial institutions, said customer demand had not slackened since July."Clients are pursuing their personal preferences, whether Islamic or conventional, regardless of who is on top in the government," she said.