Lpc sponsors force aggressive terms in europes lev loan market

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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.