Blood-letting continues

Bookrunners of the €2.2bn stuck loan backing Mediaset‘s buyout of a 75% stake in Big Brother TV producer Endemol relaunched the deal last week. They offered the paper at 72.50% of its face value, but sold it at 70% to cash buyers and at about 75% to investors requiring financing – allocating €1bn of the deal last Monday and locking in a €300m loss.

While the overhang of European deals has been greatly reduced over the past quarter, sellers have had mixed fortunes, with investors in some cases pushing against an open door on price while underwriters have pushed back wherever possible, either by stressing the strength of credits or by offering leverage to buyers willing to buy at higher prices in size.

Physical bookrunners Credit Suisse and Goldman Sachs, along with bookrunners RBS/ABN AMRO and mandated lead arrangers Lehman Brothers and Merrill Lynch, are all understood to have sold some of their Endemol positions, while bookrunner Barclays opted to hold its portion of the debt.

Cash buyers included a diverse book of credit funds taking smaller tickets, while financed buyers were a mix of sponsor-backed entities and credit funds.

The price is the most aggressive discount seen on a major deal since Goldman Sachs’ sell-down of €100m of debt backing Bain Capital’s buyout of Bavaria Yachtbau at just 65.

One bookrunner said: “Discounts are deep, but there is investor appetite for deals, both from the overhang sell-down and in new primary, which is much stronger than secondary markets imply.”

New price for old Boots

By contrast, some of those left holding the debt backing the buyout of Alliance Boots hope to sell a further (and final) £650m of first-lien term loan B debt at 92% of its face value.

In May, the deal’s bookrunners sold up to 50% of the original £5bn term loan B debt at 91%, along with a substantial portion of the £1bn second-lien tranche at 85%.

It remains to be seen whether the new price will be hit by bidders, especially given last week’s gap wider in the secondary market, but bookrunners have been emboldened by significant demand for the earlier deal, which one underwriter said would have been sufficient to sell the entire £5bn tranche, and by the strength of the underlying business which has performed well through 2007–2008.

A decrease of just 1% on the OID on a relatively small tranche may appear modest, but for banks left long on what remains of the original £9.02bn package even fractions can amount to substantial savings, and in cases where senior debt has previously been written down to below 92% the deal may provide paper gains.

The latest offering, through leads Deutsche Bank and JPMorgan, is in line with a strategy seen since the beginning of the credit crunch of drip-feeding overhang debt into the market in an effort not to overwhelm demand.

Barclays and UniCredit, on the other hand, have opted to hold their portions of the loan rather than sell at a discount and realise the implied loss, a decision in line with the position they took in May. The other original underwriters were Citi, Bank of America, Merrill Lynch and RBS, a number of which cleared their exposure to the deal in the earlier sell-down.

While that sell-down effort focused on offloading very large chunks of debt to leveraged investors, mainly linked to private equity sponsors, the new phase may target more traditional European debt investors, according to one banking source.

The Alliance Boots leads are hoping to replicate the most successful example in Europe of bringing a stuck deal back to the market, at least from a seller perspective: the sell-down of the hung debt package underwritten for Belgian cable business Telenet through bookrunners RBS/ABN AMRO, BNP Paribas and JPMorgan and mandated lead arrangers Bank of Scotland, ING, SG, Dexia, KBI, WestLB and Fortis.

In May, the leads opted to bring the deal back to market, and despite volatility in the secondary market, Telenet paper not only held its ground but the price rose as the sell-down process proceeded.

Tranches of the deal are offered in the very high 90s with leads actively changing the mix of debt available to match demand.

The core of the deal’s appeal is undoubtedly the sound underlying credit, which at 3.9 times leverage is more in line with the current market than many more aggressive deals.

In fact, while the better bid validates the decision to relaunch the Telenet deal, it had probably suffered disproportionately to the strength of the credit in earlier discounting when parts of the transaction were sold in one-on-ones with institutional investors early in the year.

The deal was originally launched in October after a senior syndication phase. The all-senior facilities recapitalised the business, which is 49.7%-owned by Liberty Global.

The original deal was made up of a €175m seven-year revolver paying a margin of 212.5bp; a €530m five-year term loan A paying 225bp; a €307.5m six-and-a-half-year amortising term loan B1 paying 250bp; a €336m six-and-a-half-year term loan B2 paying 250bp; and a €1.0625bn eight-year term loan C. Then, leverage was 4.2 times through total debt, since reduced to 3.9 times.

The effort to reduce the European LBO overhang continues to be a major focus for those banks willing to discount assets to market levels. Last week’s pricing shows credit counts, with investors bidding ruthlessly and sellers pushing hard where they can find the traction in an effort to minimise losses.

Also still in the market is debt backing Algeco’s 2007 acquisition of Williams Scotsman, where Deutsche Bank and RBS are looking to place around €1bn of the €3bn total deal.