A market under volatility
Issuers and investors in leveraged debt in the UK and in Europe are going through a moment of hiatus in terms of market activity. This, of course, is derived from recent market volatility producing difficult counterparty credit risk assessment – giving some perspective, April’s VIX spike to 45 was the third all-time high since 2004, only surpassed in October 2008 and in March 2020.
However, this state of hiatus does not equate to a complete pause in debt deals, and, importantly, unlike 2008 and 2020, the reference indexes are at levels that correspond to those of an open market (iTraxx Crossover below 400bps, ELLI at 96-97).
When shocks happen it is usually the sophisticated private lenders who step in first and provide liquidity in debt processes. Instrument prices can, however, widen as managers look at their alternative investment markets e.g. public High Yield, Broadly Syndicated Loans (primary or secondary).
Another avenue, also for credits to EUR 300m+
A second, less publicised solution has proved to be extremely effective in obtaining competitive results above the market’s default position. This is achieved by combining a local bank lender base with a book-building strategy, a solution that we have implemented in two deals in Europe in Q1 2025. The strategy eliminates any underwriting need by pooling together different commitment levels and awarding differentiated titles across 10+ participants for a multi-instrument financing in the size range of EUR 300m.
Local can be a determining factor
The European local bank lender universe is broad and deep, with commercial and product-specialist banks targeting take-and-hold participations in assorted sizes. Together, they provide a base of consistent and reliable liquidity as their appetite is set by their long-term approach to leveraged lending, their credit analysis being determined by portfolio experience, and pricing by internal models that factor in liquidity cost and capital consumption.
Local demand – defined as lenders that are national to the jurisdiction, and to a degree foreign lenders that have a local office – is critical to build deal consensus because target participants rightly assume that there is an information bias i.e. large commercial banks have better quality information on the borrowing counterparty. In this way, local banks form the front-running group of lenders for the deal, even if they cannot meet all the borrower’s required quantum – for example up to c.50% in one of our aforementioned deals.
Furthermore, interestingly, competition dynamics (i.e. banks declining to provide liquidity for underwriters which are perceived direct competitors) are removed under a book-building strategy thus amplifying lender demand.
The resulting structure – economics
The solution provides for, say, an unrated leveraged issuer:
- Bespoke to issuer tranches – from 4 to 7 facilities. With tranche amounts that can be changed along the process, capturing demand on the best terms assuming a healthy covering of the target debt of say 1.2-1.4x
- Valuable bullet debt structure if desired – say 6-6.5 years average life, with a reduced accumulated repayment of say 10% of the total facilities until the usual 3-4 years refinancing horizon; and
- A low average cost of drawn debt, say average margin over base rate in the region of 375-425bps or, in other words, 85-95bps per turn of leverage. Importantly, the removal of underwriting fees (say 100-125bps on average) and fee and margin flexes that can be potentially exercised (say 75-100bps each to give an example) is also achieved.
Beyond the economics
Today’s issuers require considerable contractual flexibility on their borrowing as we face a persistent environment of periodic economic shocks. This approach tends to result in the negotiation of terms that are as good or better than Unitranche terms such as:
- Cash preservation, including a high prepayment de minimis and wide definitions of permitted ongoing funding sources.
- Cash management, allowing Obligor to Non-Obligor transactions plus upstream distributions.
- Generous additional facilities: committed undrawn (no clean-down RCF with ancillaries, ACF); and uncommitted incremental.
- Event of Default protection by drafting the SFA (especially important) in borrower-protective local law. This is enhanced by building headroom around the corresponding single-covenant via tests (6 or 12 months), definitions, and other negotiated points.
The ultimate advantage
Ultimately, the solution puts the issuer in the driving seat in terms of process and the result, effectively acting (with their advisor) as the arranger of the new borrowing facilities and being the sole party that rewards the syndicate of lenders with allocations, titles, and fees.