Stapled Financing Back in Vogue for Buyouts

Economic woes and difficult lending conditions have prompted a return of stapled financings to back leveraged buyouts, Reuters’ International Financing Review reports.

(Reuters/IFR) – Economic woes and difficult lending conditions have prompted a return of stapled financings to back leveraged buyouts. Such structures help ensure vendors can sell their assets even in troubled times, though lenders are this time resisting traditional staples in favour of softer, more flexible options.

Stapled financings are being put together on an increased number of deals, including France Telecom’s sale of Orange Switzerland, Barclays Private Equity’s sale of tax-free shopping company Global Blue, ventilation and heating systems manufacturer and supplier Volution, which is being sold by AAC Capital Partners and Cognetas’s sale of petrol station equipment provider Tokheim.

Staples are gaining more traction as companies seek assurance and security that debt can be raised for the sale of assets amid volatile economic conditions. A number of sales have been pulled in recent months, largely due to frozen financing markets.

“Debt markets are very unpredictable at the moment – to launch a process without a stapled financing is very risky. The potential for insufficient debt being available or leverage being insufficient to underpin seller value expectations is very real and sellers are now wary of launching processes without this intelligence,” said Jonathan Guise, managing partner at debt advisory business Marlborough Partners.

He added: “Launching a process without a staple can result in a complete shambles and the vendor ending up with egg on their face if the process is pulled.”

French retail group PPR postponed the sale of its catalogues business Redcats in September. Rothschild, which had been hired to run the sale process, was unsuccessful in its attempts to put a stapled financing package together.

Yet there is an unwillingness from banks to provide traditional staples, which were used as recently as June when JP Morgan acted as sole underwriter in the staple for Aviva’s sale of UK roadside rescue business RAC and Securitas had a staple underwritten by Morgan Stanley and Nordea.

“The limited availability of financing is an issue for both buyers and sellers, so if a seller can present a financing package to potential buyers, even on a soft basis, it will help the process,” said Timothy Polglase, global head of leverage finance at law firm Allen and Overy.

SOFT STAPLES

The staples being put together on Tokheim, Volution, Orange Switzerland, and Global Blue will be “soft” and will include a number of lenders so banks are protected from market volatility.

“A staple in this environment will have no legal documents and just be a soft guidance. If there are legal docs, there will be very loose flex terms,” a senior banker said.

But attitudes to staples are changing. Whereas a traditional staple was seen by other banks as something to beat, now if a bank wants involvement in a deal the best way to do it is to be a part of the soft staple, one banker said.

Vendors also benefit from other upsides by having a staple. If bids come in quite low for an asset and a vendor decides not to sell, the option to refinance is easier.

“The prospect of deals being pulled on price grounds creates an increasing likelihood that refinancings will replace a sale, particularly with the maturity wall looming. The staple process means all the due diligence has been done and the banks are ready to roll,” Guise said. (Reporting by Claire Ruckin)