New kids on the block

Last week, Hellman & Friedman announced plans to purchase Getty Images for US$2.4bn, including debt. To do so, the firm has tapped Barclays Capital, RBS Greenwich Capital and GE Commercial Finance for roughly US$1bn in financing.

Hellman & Friedman had also mandated Barclays Capital, GE Commercial Finance and Calyon to fund its US$2.65bn acquisition of Goodman Global. The senior debt was fully syndicated, with GSO Capital Partners and Farallon Capital Management buying up the junior portion.

Private equity firms are gravitating to the new kids in town as these deals are proving able to get done. “These banks are popular because they don’t have one thing that more established US investment banks have, which is a huge inventory,” said one private equity partner.

Citi had US$43bn in unfunded and funded leverage lending exposure as of the fourth quarter of 2007, according to Meredith Whitney, an analyst at Oppenheimer. JPMorgan‘s exposure stood at US$26.4bn, Goldman Sachs had US$26bn in unfunded exposure (the bank didn’t provide funded commitments) and Lehman Brothers reported US$23.822bn in unfunded exposure.

Meanwhile, smaller leveraged finance players in the US emerged from 2007 largely unscathed, yet with built up capacity to do business. Barclays Capital, for example, reported that its leveraged finance exposure globally was US$7.4bn, but most of that stemmed from European business.

Both RBS and Barclays built up their US leveraged finance teams over the past two years, while GE expanded its capital markets group last autumn. They all remained overshadowed by more established firms in the league tables, but the results may look very different this year if the pipeline remains clogged.

“We have tremendous levels of inquiry; we’re as busy as we’ve ever been,” said Rick Van Zijl, managing director and head of US leveraged finance at Barclays Capital.

“We view this market as a huge opportunity for GE. We are very well capitalised, reflected by our AAA rating, the credit quality of our portfolio is strong, and we have a lot of liquidity while many players are capital-constrained,” said Sage Nakamura, managing director at GE Capital Markets.

Edward Massaro, head of loan and high-yield markets at RBS Greenwich, said: “We were able to distribute the majority of our assets before mid-year 2007 and thus have capacity to now underwrite new transactions. The transactions we are currently doing are conservatively structured, have lower leverage and better covenants and are priced at current market levels.”

Both Goodman Global and the forthcoming Getty Images are structured in ways that appeal to buyers in the current market. Goodman Global had three financial covenants with reasonable cushions. Getty Images will be roughly three times leveraged compared with the sometimes eight to 10-times leveraged deals seen last year.

“The issue with Goodman was just steering it through a choppy market. We name-by-name placed that with about 60 investors who liked the industry, liked the credit and liked the structure,” said Tim Broadbent, managing director in US leveraged finance at Barclays. Goodman Global’s loan continues to trade above its new issue OID.

Underwriters also are working with a more varied group of investors, which range from traditional bond buyers heading into the loan market and hedge funds to mezzanine funds and LPs of private equity funds.

“In the aggressive credit market of 2006 and the first half of 2007 investors could not meet their return hurdles of 12% to 14%,” said Massaro. “In the current market there are now those kinds of opportunities and significant amounts of money have been raised to take advantage of this environment.”

Much the same trend is evident in Europe this year, notably Turkish banks Garanti Bank, Is Bank and Vakifbank backing the BC Partners led buyout of Migros Turk, Turkey’s largest supermarket chain. An initial US$1.64bn deal for more than 50% of the shares will be followed by an effort to take complete control of the business.

The banks backed the deal at a price that caused more established LBO financiers to balk. Turkish and other regional banks have liquidity, a willingness to lend locally and an appetite to take and hold debt that makes them less dependent on syndication.

Rabobank has noticeably increased its profile. It is sole underwriter of the debt backing Bridgepoint’s agreed £345m buyout of sandwich bar chain Pret a Manger and bookrunner – alongside MLAs AIB, Bank of Ireland and ING – of €275m of debt backing CapVest’s buyout of Dutch coffee business Drie Mollen.

Herald Top, executive director in Rabobank’s loan syndication team, said increased prominence need not reflect a change in strategy, adding: “We remain active in the mid-market, where we have always been active, and have done bigger deals historically. We appear more prominent at the moment because of the disappearance of some other banks.”

Syndication of Drie Mollen is an example of the clubby way in which such deals are being structured. Having three MLAs at the top means that the banks’ focused sell-down is, like on the Migros deal, less reliant on wide syndication and not at all on institutional investors.

Top said: “The market remains interesting to European bank lenders attracted by primary deals offering lower leverage than the secondary market. Pricing is still modest in Europe relative to the US, and fee level demands are not prohibitive for deals based on sound credits and conservatively structured. There is an increasing tendency among some European players to work in partnership, so as to share the risk and deliver the sell-down.”

In effect, this is a return to the traditional bank group syndication, undoing the convergence between Europe and US that was driven by CLOs in 2006–07.

Top is again keen not to overstate the case, saying: “Markets seem to be reverting to operating independently again in part simply because deals have become smaller with more local focus.”

Bigger deals, in particular in core LBO markets, continue to feature mainstream arrangers. Morgan Stanley is sole underwriter of the US$1.34bn (£672m) debt package supporting First Reserve Corporation’s buyout of CHC Helicopter Corporation, while sponsors Montague and GIP mandated Barclays, Credit Suisse, HBOS, HSBC and RBS to back the £1.7bn public-to-private bid for Biffa. Bank of Ireland, Barclays, Merrill Lynch and RBS last week launched the mid-market IDH deal (see ‘Agony and Ecstasy’).

However, with the market now in constant flux, the traditional leads face competition from increasingly diverse sources.