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Size matters in Europe’s dual-track leveraged loan market — Reuters

LONDON, March 2 (Reuters) – A dual-track market is developing in Europe’s leveraged loan market where larger loans are received better than smaller financings as investors want borrowers to pay up for illiquidity.

A number of recent big, liquid international deals have been reverse flexed to rein in pricing while the opposite has occurred on a number of smaller, more illiquid deals where borrowers have had to flex pricing wider to attract investor attention.

Austrian packaging group Constantia Flexibles reverse flexed twice before closing to pay 375bp on the euros and dollars, from initial guidance of 425bp-450bp, while Swiss packaging group SIG Combibloc’s dual-denominated loan reverse flexed at the start of February to pay 425bp from initial guidance of 450bp-475bp.

Earlier this year, a financing for Altice’s acquisition of Portugal Telecom finalised at 425bp on both the euro and dollar tranches, from initial guidance of 475bp-500bp on the euros and 500bp-525bp on the dollar tranche.

In stark contrast, investors are demanding concessions for a number of smaller deals. The demands are increased when a borrower attempts to go covenant-lite or opts to raise a less liquid currency such as sterling, as investors perceive it harder to trade out of the paper on Europe’s secondary loan market if they want to exit the credit quickly.

Dutch software company Exact, German elevator components maker Wittur and online betting business Sky Bet were all small covenant-lite financings that had to flex pricing wider to get the deals done. A dollar portion of Exact has still not sold.
Other small deals in the market such as a 185 million euro ($207.68 million) covenant-loose leveraged loan financing backing Suzo-Happ’s acquisition of Swedish peer Scan Coin and the refinancing of existing debt has still not closed. Original commitments were due Feb. 18.

A covenant-loose loan financing backing European investment group Investindustrial’s acquisition of a majority stake in Southern European car rental company Goldcar eventually closed in mid-Feb paying 550bp with a 96.5 OID on a 275 million euro TLB, having launched in December with initial guidance of 450bp at 99.

“Bigger financings are for bigger companies and quite often bigger companies are better credits, which is a massive over simplification but it is often the case. The hardest deals are like Dennis Wise – small, nasty and British,” a European loan banker said.

Some smaller credits have been well received such as UK safety and survival equipment maker Survitec which allocated on Feb. 27 having double reverse flexed. The credit stood out from other smaller deals this year as it had some supportive existing investors and was a strong performer with a good track record, bankers said.

Once a few of the larger funds that are able to invest sizeable commitments have decided against a deal, it can make it a tough sell, especially without making some adjustments. The recent widening of pricing on smaller deals could lead bankers to reconsider the deals they go into or the terms they are prepared to offer when pitching to borrowers.

“Some banks lost their shirts on a few of the recent smaller deals which were not roaring successes. It could put banks off of doing some of the smaller deals going forward,” a second loan banker said. ($1 = 0.8908 euros)