Loan bankers seek ways to generate deals as LBOs dry up

By Claire Ruckin

LONDON (Reuters) - European leveraged loan bankers are pitching dividend recapitalisation deals and other leveraged financing options to sponsors as the supply of buyout loans dries up.

Faced with very little dealflow and time on their hands, leveraged loan bankers are inviting sponsors to reprice deals on better terms to reduce borrowing costs, remove covenants on deals that are not covenant-lite and raise extra debt to enable borrowers to extract value through dividend payments.

“People are nervous about the lack of deal flow. Bankers are pitching anything and everything right now as the high yield and leveraged loan markets are open,” a banker said.

Despite a strong start to the year where banks were busy working on a variety of LBOs, including Austrian packaging group Constantia Flexibles, Altice's Portugal Telecom and Swiss packaging group SIG Combibloc, the pipeline has now dried up.

The outlook for new deals is being hindered further as owners have become increasingly attracted to exiting a company via the capital markets rather than a sale, in a bid to obtain maximum returns.

European drinks bottler Refresco Gerber is seeking a stock market listing in Amsterdam, disappointing leveraged loan bankers that had been working on debt packages of up to 1.4 billion euros ($1.52 billion) to back a potential sale.

Advent is preparing an exit from German perfume chain Douglas and has asked JP Morgan and Goldman Sachs to organise a sale or listing, while Cinven mandated Rothschild in January to explore options including a sale or listing of its German truck and trailer parts maker Jost. Meanwhile, Hellman & Friedman are expected to push ahead with an IPO of energy analysis group Wood Mackenzie.

Any M&A that does happen will take some months to reach the leveraged loan market leading bankers to try to generate business by changing existing deals.

“We would all like more LBO deals for sure. A month ago it did not look likely there would be that much refinancing this year but actually its looks as though there will be now. Dividend recapitalisations and repricings are what will be happening at least in the short term, it is what keeps things ticking over,” a second banker said.


Sponsors are viewing the approach as positive, eager get better terms on deals. Conversely, cash-rich investors are preparing for looser terms on more aggressive deals. Investors are unlikely to put up too much of a fight though for fear of repayment, given the lack of deal flow.

“Every deal we have ever looked at we are talking to sponsors about doing a dividend recapitalisation on. Any banker who has ever done a deal will look at what they can do as possible investors have cash bursting out of their ears,” a third banker said.

Despite keeping bankers busy, the workflow is unlikely to be that rewarding or cash generative as most of the deals will be pitched on a best efforts basis, which typically generate fees of 50bp-100bp.

“If a big team is not bringing in income then they have the head count to chase the sponsors and pitch for this work, but there is no money in it though,” a fourth banker said.

($1 = 0.9196 euros)

(Editing by Christopher Mangham)