The other overhang

Through bookrunners Barclays and Merrill Lynch, Ineos‘s decision to pull syndication of the €620m stand-alone debt package backing its acquisition of Kerling has highlighted the continuing difficulty that banks face holding bridges to what should be European high-yield take-outs.

Although the deal pulled was not a high-yield offering, the 18-month senior loan and two-year mezzanine structure was an effort to syndicate a bridge loan originally underwritten in the expectation of a later high-yield take-out – ideally as an add-on to existing Ineos level debt. The deal is one of a number of European bridges that have sought to de-risk through alternative avenues since the primary bond market closed in July 2007.

However, the market for new European high-yield issuance remains moribund – a function of relative cost, pushed up by high Euribor spreads.

“With borrowers paying in the region of 400bp over Euribor for senior loans, junior debt needs a further 200bp premium. Including Euribor, that means paying 12% for decent credits,” said one European banker. “At that price, locking borrowers into eight-year non-call four or 10-year non-call five tenors looks less attractive than paying up for mezzanine.”

Bankers do see prospects for some euro-denominated notes being priced, but in the context of a globally marketed, mainly dollar deal.

“It will take a couple of deals like Fresenius that don’t need Europe but may price euro notes opportunistically. If these then trade well, they might point the way for a true European deal,” said one investment banker.

Sources say German healthcare group Fresenius will look to place as much as US$1bn of high-yield bonds as part of the debt backing its US$3.7bn acquisition of APP Pharmaceuticals, a manufacturer of generic drugs. Although expected to be mainly dollar-denominated, the issue could include some euro notes. Fresenius has already mandated Deutsche Bank, Credit Suisse and JPMorgan to arrange a US$2.4bn senior debt package.

With little prospect of the public markets opening up for the kinds of deals held on balance sheets, efforts such as the Ineos Kerling loan syndication strategy looked like an efficient way of managing down exposure; but even that has not proved immune to the high-yield crisis.

The deal suffered from unlucky timing, which saw the loan launch to syndication just as oil price increases put pressure on Ineos level debt in the secondary markets. That the deal was ever considered as a senior debt/mezz transaction, however, shows the efforts underwriters have gone to in order to manage down their exposure to hung bridges.

While featuring a mix of credits, the attached table (“Unplaced EMEA high-yield Bond Deals”) gives a good sense of why some have such remote prospects of being placed. The table includes a range of LBO financings underwritten in 2007 that backed buyouts of a kind now distinctly out of favour, from South African issuers to a French house-builder and UK building supplies manufacturers.

For most of these credits, however, even a successful euro tranche for Fresenius, a leveraged corporate in a defensive sector tapping the market opportunistically, will do little to improve the prospect of a full, formal take-out.