Bloomberg News

LBO Loans in Europe Discounted to Deepest Since 2008 on Crisis

October 10, 2011

Oct. 10 (Bloomberg) -- Banks are offering the deepest discounts on new leveraged buyout loans to attract investors concerned about policy makers’ ability to contain Europe’s sovereign debt crisis since 2008.

The average offer price for buyout loans dropped to as low as 94 percent in Europe last week from 97 percent in the first nine months of the year, according to data compiled by Bloomberg. The lower the so-called original issue discount, or OID, the bigger the yield for investors.

German chancellor Angela Merkel met with French president Nicolas Sarkozy yesterday in Berlin to forge a “durable” solution to Greece’s debt load threatening losses at European lenders. Banks are offering bigger discounts to attract investors to new loans as prices of existing loans in the secondary market drop below 90 percent of face value, according to Markit Group Ltd. data.

“Banks are doing the right thing to mark the loans to market level so they can get the deals out of the book and move on instead of sitting on it,” said Richard Munn, London-based co-head of European investments at Oak Hill Advisors. “Arrangers have realized that they need to increase the OID on primary deals to a new level to be competitive with the secondary market and to attract investors’ capital.”

‘Broader Concern’

Com Hem, the Swedish cable operator being acquired by BC Partners Ltd., is offering euro-denominated loans at 94 percent to 95 percent of face value, compared with about 98 percent last month, people with knowledge of the deal said Sept. 30. The buyout financing totals 7.1 billion kronor ($1 billion).

Bureau van Dijk Electronic Publishing, a Brussels-based business-information publisher being bought by Charterhouse Capital Partners LLP, also reduced the proposed offer price on loans sold to non-bank investors to 94 percent of face value from 98 percent in August. It increased interest by 25 basis points to 500 basis points more than the euro interbank offered rate, Bloomberg data show. A basis point is 0.01 percentage point.

“This is a reflection of broader concern on the sovereign crisis in Europe,” said Patrice Maffre, co-head of EMEA acquisition and leveraged finance at Nomura Holdings Inc. in London. “The market is in price-discovery mode with investors, who have the options of not investing, buying in primary, picking up things in secondary” and investing in the U.S.

Loans to fund the acquisition of Bavaria Yachtbau GmbH by Bain Capital LLC were sold in 2008 at 65 percent of face value in the biggest disclosed discount, according to the data.

Henry Kravis, co-founder of KKR & Co., said on Sept. 28 private-equity deals are becoming more expensive as the reluctance of banks and investors to lend drives up borrowing costs. The cost of capital for LBOs has risen more than 2 percentage points since KKR agreed to buy Pfizer Inc.’s Capsugel unit in April, forcing buyers to put up more cash for deals and borrow less, he said.

Banks “underwrote these deals in the first half of the year when we were in a different world but now things have changed and they have learnt the lessons of 2008 and 2009,” Munn said.

--Editors: Cecile Gutscher, Andrew Reierson

To contact the reporter on this story: Patricia Kuo in London at pkuo2@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net


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