The leveraged buy in

CVC has mandated Bank of Ireland, Calyon, Heleba, LBBW, Lloyds TSB, Mediobanca, RZB and WestLB to underwrite a €1.25bn debt package backing its purchase of a 25.01% stake in German industrial group Evonik.

The debt includes a €1.2bn five-year term loan and a €50m five-year revolver, both paying 450bp over Euribor. Underwriters intend to syndicate the debt that is structured at the acquisition vehicle level and accounts for about 50% of the €2.4bn purchase price,

The five-year tenor reflects the intention of both CVC and Evonik’s main shareholder – the state-backed RAG Holdings – to launch an IPO of the business within the next five years. The shorter tenor may also help in selling down the debt to local lenders.

Leveraged stake purchases are a rarity, not least because debt is raised away from the target company with no direct access for lenders to cashflow or to assets, nor any lender control over dividends at the operating company level.

On the other hand Evonik’s state-owned parentage through RAG Holdings is a strong appeal to German lenders and is likely to have been decisive in gaining lender backing.

Leveraged finance bankers are sceptical that the deal sets a real precedent. While sponsors are increasingly targeting minority stake purchases, as a rule this is being done without recourse, or access, to leverage.

Indeed last week saw two more such deals. A consortium of private equity investors comprising Apax Partners, TA Associates and Madison Dearborn Partners bought a 10% stake in Weather Investments, the telecoms holding company controlled by Egyptian businessman Naguib Sawiris for €1.1bn.

A source close to the deal said that Apax Partners had paid €550m for its 5% stake, while TA Associates, a private equity firm with offices in Boston, California and London, and Chicago-based buyout house Madison Dearborn Partners paid a further €550m between them for the remaining 5% holding.

Sawiris pushed through the sale in order to repay about €1bn in loans owed to Italian energy group Enel dating back to his €12.1bn purchase of Wind Telecommunicazioni in 2006. Weather also owns Egyptian telecoms group Orascom, of which Sawiris is chief executive, and Wind Hellas.

The original Wind acquisition was Europe’s largest LBO at the time, with Sawaris acquiring a 62.75% stake while Italian power group Enel held the remaining 37.25% stake. In early 2007 Weather bought TIM Hellas, since renamed Wind Hellas, for €3.4bn from Apax and co–owner TPG.

Meanwhile TPG took a 23% stake in UK mortgage lender Bradford & Bingley to become the bank’s largest investor with a US$179m investment.

For the most part the impetus to buy into minority stakes rather than buy out controlling interests is a reflection of post credit crunch realities.

Leverage is simply not available in sufficient scale for sponsors to contemplate buyouts on the scale of either Weather or Evonik – even where they see potential for the business.

On the other hand the crisis has had a drastic effect on the equity values of some financial institutions, creating high risk potentially lucrative opportunities for funds that have vast funds waiting to be deployed.