Issue: 1252 - 27 April 2012

Keywords: Leveraged finance, LBO, BSN Medical, BirdsEye Iglo

Leveraged finance bankers are hoping that the inevitably strong competition among arranging banks for popular LBO credits will not lead to the market over-reaching as it did in the summer of 2011. Then a lack of deals in the early part of the year led to aggression in pitching for mandates and an over-crowded primary market by the summer — leaving banks long on most deals. 

Early-stage auctions for German bandage maker BSN Medical and UK food group Birds Eye Iglo have caught the market’s attention, as they are credits that are performing, have large existing syndicates and are candidates for bank and bond financings.

A summer of hung deals like the last would be a disaster for the leveraged loan market, which is still offering exceptionally high margins to entice investors into new deals, and needs to prove its stability as it looks for alternatives to the evaporating CLO bid.

But, for now at least, there is little evidence that last year’s over-exuberance is being repeated.

Banks have only this week seen the numbers for BSN, meaning anyone quoting potential leverage ratios for the company was effectively "plucking numbers out of the air", said one bank investor.

Investors had previously warned that they had already been sounded out on deals that were too aggressively levered — with one claiming that a leverage multiple of seven times was being discussed for BSN. "People have been talking up the leverage on BSN for weeks, but it has been pure speculation," he said. "Until very recently there had been no sales memorandum, no vendor due diligence, and sponsors hadn’t signed NDAs."

A majority of underwriters urged the market to remain vigilant, though they admitted that greater dealflow was necessary if the market was not to succumb to the dangers of competition.

"The danger is that with a lack of fee pipeline one or two people throw the kitchen sink at deals, and then it is difficult to claw back market discipline," said one LevFin banker.

One leveraged loan banker with 20 years of experience described the market as "the quietest I have ever seen" this week.

However, a pipeline of early-stage auctions is emerging, leaving the possibility of a busy end to the summer. "Things will take a couple of months, but if everything hits at the same time it could be a bit of a squeeze," said another banker.

One factor that may rein in aggression is a certain mistrust of how much liquidity exists in the institutional investor base, as one banker suggested that some underwriters felt they had been let down in 2011 by loan managers who had claimed to have more cash than they really had.

"I think a number of bankers learned a lesson last year and are very sceptical about the feedback they receive from institutional investors," said one. "There were a lot of broken promises last year."

The question remains as to how well ideas of principle work in practice, as LevFin teams look to justify their existence.

"You’d like to think that after last year went so badly, people will have long memories at least when they get to credit committees," said one banker. "But it is hard for capital markets teams to plead with origination to be less aggressive if they have missed out on deals that have gone well.

"It is the tight flex terms that cause underwriters to lose money, and you can get kicked off a deal if your requirements are too wide, so it’s a hard ask to keep discipline."

BSN’s staple financing puts senior leverage at 4.5 times Ebitda, with total leverage 6.5 times including subordinated debt.