Reuters: Private Equity: Bumper LBOs poised for high-yield return in Q2

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Bumper LBOs poised for high-yield return in Q2 May 4th 2012, 10:30 By Natalie Harrison Fri May 4, 2012 6:30am EDT LONDON, May 4 (IFR) - A fresh batch of leveraged buyouts backed by billion-plus debt packages look set to make a return with several high profile deals likely to propel high-yield bond issuance to new records. Despite a shaky start to primary activity this year, European high-yield issuance has reached EUR25bn-equivalent, albeit with a helping hand from the U.S. bond market This is about EUR20bn shy of the EUR44.4bn supply in 2011, and within reach of the record EUR52.4bn in 2010, if the strong pace continues "Volumes are up on last year, but that has been driven by refinancings. It really hinges on M&A prospects whether we can materially surpass records, but some of the auctions have sizeable debt," said one high-yield syndicate banker. Big ticket bond financed LBOs, excluding hung deals from last summer, have been absent from Europe's high-yield market for around 10 months. German bandages maker BSN Medical and Birds Eye fish finger maker Iglo - owned by private-equity houses Montagu and Permira respectively - are among the deals garnering the most attention currently with first round bids due later this month. The size of the debt involved, expected to be more than a billion euros for each, and the relatively high leverage of the staple financing - above six times earnings for both - have also raised eyebrows, especially as a backlog of hung bond deals from 2011's mid-year buyout frenzy have only just been cleared. "These are pretty aggressive financings, but the businesses can support those kind of multiples," said one senior leveraged finance banker. Sizeable dollar revenues for some of the assets up for grabs, including BSN, are also a vital factor, the banker said. "It makes the U.S. bond market a more credible financing avenue if economic conditions in Europe worsen dramatically, and bring another halt to issuance windows," the banker added. Goldman Sachs and HSBC are sell-side advisors on BSN Medical, while Credit Suisse is sell-side advisor on Iglo. Among the private equity groups that have expressed an interest in Iglo are Bain, BC Partners and Blackstone, another senior leveraged finance banker said. BIG TICKETS Bankers have been growing steadily confident that private-equity sponsors would turn to sales, rather than listings or dividend recaps, for exit strategies as high-yield markets have gradually thawed. Yields tightened by about 2.5% in the first quarter and Single Bs have accounted for a growing share of supply. Other notable acquisitions that will include high-yield bond financing include the purchase of Rhoen-Klinikum by German healthcare company Fresenius. Credit Suisse, Deutsche Bank, JP Morgan, Societe Generale and UniCredit have underwritten the debt backing the transaction, which will also likely include loans and equity instruments worth up to EUR1bn. Terra Firma is turning to bonds rather than loans to fund its buyout of restructured care homes business Four Seasons, with a debt package arranged by Barclays and Goldman Sachs. Not only are investors familiar with that sector, following bond deals for the Priory and Care UK, but the new owners will have greater financial flexibility, bankers said. "From the perspective of the Four Seasons management team, they've had years of restructuring and dealing with strict quarterly covenants," said another high-yield syndicate banker. "Bonds are the most flexible financing you can get, and this will allow the owners to focus on the long-term prospects of the business without the screws being turned on them by lenders." This year hasn't been totally starved of LBOs, but of the few that have surfaced - including Ahlsell, CPA Global and frozen food group Iceland Foods - the financing has been provided in the leveraged loan market. Other buyouts for mobile phone group Orange Switzerland and chemicals company Taminco have opted for a combination of loans and bonds, although the latter funded completely in dollars. The new deals, because of their size, will need the bond market. LESSONS LEARNT Not all deals have been plain sailing in recent weeks, adding an err of trepidation among the investment banking community. A EUR300m high-yield bond backing the LBO of Ascometal, for example, was pulled in March even after price talk spiralled to 13-13.5%, and French rental car company Europcar had to restructure its bonds this week after a backlash from investors. Ascometal, in particular, was generally observed to have the wrong capital structure, while one said the Europcar case should be looked at in isolation. "I don't want to say Europcar is a restructuring, but it is certainly a very challenging refinancing where investors have some leverage because the existing bonds are trading so wide," said the banker. "It does not mean that LBO financings cannot get done. Most that have been done in the loan market this year have gone reasonably well." Another senior banker said some banks were cautious, and that the conditions were still too volatile to inspire another buyout frenzy reminiscent of last year. "Some are hesitating about whether to step in and back deals, especially for businesses that might be a little bit more difficult for investors to get their head around," the banker said. The sale of Swiss-based tax-free shopping business Global Blue, owned by Equistone and being advised by JP Morgan, falls into that category, he added. Link this Share this Digg this Email Reprints

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