Reuters: Private Equity: Cleared hung deals pave way for bond-backed LBOs

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Cleared hung deals pave way for bond-backed LBOs Mar 30th 2012, 12:03 By Natalie Harrison Fri Mar 30, 2012 8:03am EDT LONDON, March 30 (IFR) - Leveraged finance bankers are growing more confident that high-yield bonds will play a crucial role in leveraged buyouts in 2012 now that nearly EUR4bn of hung leveraged buyout bridge loans from last year is mostly refinanced. The EUR375m Triple C bond for French mechanical engineer Spie, which priced on Wednesday at a yield of 11%, has taken out a bridge loan that has been stuck on banks' books for nine months. It follows the refinancing of several other hung bridges in the past few months for Com Hem, Securitas Direct and Polkomtel. Spie was seen as a key test of investor appetite due to its low rating. But an order book of around EUR1.4bn has boosted confidence that the high-yield market, which was badly hamstrung in the second half of 2011, has returned to good health. Although the pace of M&A deals is much slower than a year ago, bankers say they are working on debt packages for several LBOs that may encompass high-yield. "Now that markets have ramped up and taken banks out of their inventory, the high-yield market is in a much better place," said one senior leveraged finance banker. Auction processes in the works include the sale of French eyewear retailer Alain Afflelou, German bandages maker BSN Medical and the sale of Permira-owned Iglo, the maker of Birds Eye fish fingers. The biggest of those is Iglo, which is expected to include EUR1.75-2bn of debt. Equity cheques are expected to remain in the 40-45% range, bankers said, but there is some debate about whether financial sponsors, who want certainty of financing, will opt for mezzanine loans over high-yield. The reopening of the bond market is now leaning towards the latter, some said. One high-yield syndicate official said mezz funding was running at close to 12%, while recent LBO bonds have priced with yields of around 11%. Mezz also comes with stricter maintenance covenants, which could also prompt a swing in favour of bonds. "In current market conditions, I would expect four out of five sponsors to pick high-yield over mezz, but if the market softens up again, mezz is still an alternative corporate financing tool," the senior banker said. SEEING THROUGH RATINGS Spie is not regarded as a game changer in itself, but it does prove that investors look beyond ratings. "Late last year, it looked like CCC-rated paper was going to be difficult to place anywhere but with U.S. based accounts," said Douglas Clarisse, head of European high yield capital markets at HSBC. "However, given the strong demand we saw from European accounts for Spie, I feel much more comfortable that we can distribute significant amounts of CCC risk in Europe - assuming the issuer has a demonstrated ability to generate free cash flow and deleverage, has a good brand and/or competitive position, and a strong management team." Investors are certainly feeling more confident. A seven point jump in Securitas Direct bonds -- which priced in February at steep discounts and left some of the underwriters nursing losses -- has rewarded those investors who took a chance when markets were still very volatile. Banks are also taking a more pragmatic stance, being only too aware that one deal - the EUR300m bond backing the buyout of French specialty metals firm Ascometal - is struggling. "Spie was considered one of the toughest high yield bridges to clear because of the public triple C rating. But the market has shown that it can pause, digest and handle more complex deals," said Tanneguy de Carne, head of high-yield capital markets at Societe Generale CIB. "Clearly bridges tie up a bank's capital, and a bridge which is de facto rated triple C consumes more of that capital and can be expensive when you have to carry it through year-end. But if the credit has a good story, a solid management team and a well-known sponsor the market will be able to absorb it and therefore the underwriting bank will work constructively." INVESTORS STILL CAUTIOUS Yet to surface is an expected EUR500m bond that will refinance a bridge for Italian telecoms company Wind Telecomunicazioni, which matures in October 2012 and financed its acquisition of Long Term Evolution (LTE) frequencies. Bank of America Merrill Lynch and Morgan Stanley, meanwhile, are negotiating with hedge fund investors on the pricing and structure of Ascometal after the bond failed to price last week. The 11% yield that investors were initially guided towards rose to 12%-plus and is now heard to be in the region of 13%-13.5% with some form of Original Issue Discount, bankers close to the deal said. At that level, some bankers said, the underwriters will probably make a loss. One syndicate official described Ascometal and Spie as "night and day". Ascometal is rated higher at B2 by Moody's, but that is because it is a secured bond, the banker said. "There is no comparison at all. Ascometal is coming out of a restructuring, as well as having a huge amount of assumed cost savings, and negative EBITDA in 2009," the banker said. (Reporting by Natalie Harrison, IFR Markets) Link this Share this Digg this Email Reprints

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