While the U.S. subinvestment-grade market, especially on the bond side, has seen a steady stream of European deals recently, one group of investors likely wouldn’t mind being shown a bit more love by these issuers and their underwriters: European CLO managers.
You are forgiven if you were under the impression that collateralized loan obligations in Europe had met their demise. Picking up the financial press or hearing talk in the broader market, one could easily come to that conclusion. And true, new CLO creation in Europe has come to a standstill, and with the broader economic issues and unfriendly regulatory environment there, no one expects that to change anytime soon.
However, there are still an estimated $121 billion in European arbitrage CLOs outstanding, according to JPMorgan analysts, with $80 billion still in their reinvestment periods. Factor into the mix a dearth of new issues during the second half of 2011 and loan prepayments that have dumped cash back into CLO coffers and you have more than a handful of funds hungry for deals.
“You are now seeing quite a lot of reverse demand,” a London-based CLO manager said.
No one knows exactly how much cash these managers have on hand, but market participants say there is a decent amount of CLO funding available for the right buyout, especially the secondary or tertiary buyouts that are expected to make up the majority of near-term deal flow in Europe.
“Based on prepayments and retained cash, select European institutions do have some cash in their CLO vehicles that they can use for new deals, it’s not massive, but it is there,” a London-based banker said. “More importantly, if the deal is a refinancing or extension of an existing position that they like, and the maturity of the new deals works with the structure of their CLO funding, they’ll roll into a new deal.”
Fiona Hagdrup, director of fixed income, leveraged finance at M&G Investments, adds: “If it’s a mainstream, straight-forward credit, particularly those that are passing hands from one sponsor to another, those sorts of deals would be very heavily sought after.”
Indeed, they have been heavily sought after—with pent-up demand from European CLOs at times outstripping supply.
Case in point: Taminco Global Chemical. The Belgian chemical producer last month issued both high yield loans and bonds to support its purchase by Apollo Management from CVC Capital Partners. The $400 million in 9.75% second-lien notes were sold to U.S. investors, and the accompanying $505 million term loan was split into tranches totaling $350 million and €120 million. Citigroup, Credit Suisse,Nomura Holdings, UBS, Deutsche Bank and Goldman Sachs arranged the financing
“They could have priced two or three times more here,” the London-based CLO manager said. “It was a bit frustrating.”
In fairness, the U.S. market at the moment makes sense for many European issuers because it offers a broader investor base and deeper liquidity, and the dollar-to-euro swap has been favorable. So much so that even companies that don’t have American subsidiaries or revenue in dollars have done deals here recently, including Polish mobile-phone company Polkomtel, which priced a $500 million high yield bond issuance to fund its acquisition by billionaire Zygmunt Solorz-Zak, and Kabel Deutschland, Germany’s largest cable television operator, which increased its first U.S. dollar leveraged loan by 50% to $750 million because of strong demand.
And market participants expect this trend to continue, at least in the near term.
One bright spot for European CLO managers, though it is a refinancing not a buyout, is Schaeffler. The German ball-bearing maker on Jan. 27 announced an agreement for a new €8 billion credit facility—consisting of a €7 billion term loan and €1 billion revolver—with eight banks, part of which will go to institutional investors. The loans refinance an outstanding €7.7 billion facility maturing in June 2014, so any existing CLO managers will like roll into the deal. BNP Paribas, Commerzbank, Deutsche Bank,HSBC, JP Morgan, LBBW, Royal Bank of Scotland and UniCredit are the banks on the loan.
The company is also making its debut on the high yield market, with a senior secured bond of as much as €2 billion, split between euros and dollars, which will also be used to refinace the existing debt. JPMorgan is the left lead bank on the dollar tranche, while Deutsche Bank is leading the euro portion of the deal.
Loan prepayments often take place when a company decides it make sense to take out a term loan early with a high yield bond. That’s the case of another current dual-tranche bond issuer, Ineos, which market participants cite as an example of the prepayment trend.
The Switzerland-based multi-national chemical company is offering an $850 million-equivalent senior secured bond, split between euros and dollars. The bond will refinance a term loan B maturing in December 2013, which consists of a €1.059 billion tranche and a $665 million tranche, according toThomson Reuters Loan Pricing Corp.
Barclays Capital is the left lead on the euro transaction, while JPMorgan is leading on the dollar tranche.
While the European loan investor base is nowhere as broad as that of the U.S., it does appear to be growing. Europe has quite a lot of strong regional banks that have been active, market participants say, especially with funding middle-market companies. And there is a small but growing fund base.
For example, Intermediate Capital Group, Europe’s largest buyout debt provider, is planning to raise a senior debt fund directly from institutional investors. The company recently said it was “actively considering” raising a fund, which could attract €1 billion. ICG has raised four mezzanine debt funds, with the last attracting €1.2 billion. The senior debt market is three to four times as large as the mezzanine market.
An ICG representative did not respond to emails regarding the fund.
But the European loan market will need to see significantly more broadening of its institutional base if it wants to keep more deals at home in the future. While active now, many European CLOs are seven-year vehicles created in 2006 and 2007, meaning they’ll reach the end of their reinvestment period next year or in 2014.