Crossover lending taking off in Europe

The headquarters of Fresenius is pictured in Bad Homburg near Frankfurt February 24, 2010. REUTERS/Johannes Eisele

By Claire Ruckin and Alasdair Reilly

LONDON (Reuters) - European companies including German healthcare group Fresenius are choosing to keep non-investment-grade credit ratings and loan structures to keep access to a liquid and flexible European loan market, bankers said.

Companies are choosing to maintain 'crossover' credit profiles instead of moving to more restrictive investment-grade credit ratings and loan structures.

This allows the companies to keep financial flexibility, higher debt levels, access to a more diversified investor base and the ability to distribute dividend payments to shareholders.

"Crossover is really taking off in Europe," a senior loan banker said.

Europe's crossover market is growing as sub-investment-grade companies, many of which are strongly performing former private equity buyouts, actively manage their capital structures.

This gives the companies more freedom to raise new acquisition loans or add new tranches to existing loans than investment-grade credit ratings would allow.

Acquisitions by more leveraged European companies is expected to be a major trend of the next three months, bankers said.

Fresenius is raising a 1.8 billion euro ($2.48 billion) one-year bridge loan to back its 3.07 billion euro acquisition of 43 hospitals and 15 outpatient facilities from Rhoen Klinikum.

BB+/Ba1 rated Fresenius is planning to increase an existing senior secured loan by 1.2 billion euros by using an accordion feature, which allows the company to raise up to 1.6 billion euros in extra commitments without having to refinance its existing debt.

The option to increase the financing, which is one of the largest accordion features seen on a European deal to date, gives Fresenius the financial flexibility to make acquisitions.

"Companies such as Fresenius have made a conscious decision to stay non-investment-grade," a European loan syndicate head said.

Dutch cable company Ziggo , which was originally a private equity buyout, gradually refinanced its capital structure with loans and bonds.

"Ziggo could easily become an investment-grade company but has decided to keep a bit more leverage in order to distribute as much in dividends as possible," the senior banker said.


Some European companies that were formerly private equity buyouts are performing strongly and have refinanced their original buyout capital structures into more hybrid crossover debt structures.

These companies include Irish paper and packaging company Smurfit Kappa Group, German forklift truck maker Kion and Swedish surgical and wound care product maker Molnlycke.

The loans are attractive to investment-grade lenders as they carry margins up to 200 basis points (bps) higher than investment-grade loans for highly rated companies, for a one or two-notch difference in credit ratings.

The deals also appeal to leveraged loan investors, which are willing to lend to more highly-rated borrowers for lower margins than offered by riskier buyout financings.

"Crossover credits are safer and less leveraged than a leveraged deal but produce better yield than an investment-grade company. There needs to be a balance of flexibility to borrowers and protection for lenders," the senior loan banker said.

(Editing by Tessa Walsh)