(Bloomberg) -- Banks risk missing out on lucrative underwriting fees on two of the biggest buyout deals in the market as private-equity firms tweak debt terms mid-way through the sales process.
The practice of introducing portability into deals locks a company’s old borrowing in place and avoids the situation where a sale triggers change-of-control provisions that require a buyer to immediately refinance or pay off debt.
It’s good for private-equity firms, which are nervous about getting deals done in a rocky M&A market, and underscores the extent to which they now call the shots. But it’s bad news for banks, which have to accept fewer fees just as they were looking forward to providing financing for a sprinkling of new buyouts after a lean couple of years.
In the case of two of the biggest deals on offer in Europe’s leveraged finance market — the buyouts of drugmaker Stada Arzneimittel AG and metering company Techem GmbH — the clauses mean that lenders could wind up underwriting far below the expected €9 billion ($9.8 billion) of financing for the German firms — and raking in much less in compensation as a result.
The portability feature has become more common in debt packages, but “what’s unusual is to see companies coming with a refinancing to introduce portability during an exit process or a sales auction,” said Julia Frank, a managing director in loans and leveraged finance at Citigroup Inc.
Private-equity firms got used to receiving portable loans when private credit firms were gobbling up the bulk of deals in the market. But now that sponsors are back to using banks to finance the bulk of their buyouts, they want to keep the perk.
Another advantage of portability is that it gives private-equity firms some protection if a deal falls through.
“Introducing portability allows the company to avoid running into any maturity problems in case the sales process doesn’t come to fruition,” said Citigroup’s Frank. “The refinancing / LBO financing market is hot but there are still some question marks over valuations when it comes to sales processes.”
Settling for Less
While investment banks are eager to provide financing for buyouts in their entirety, they’re having to settle for smaller amounts as they work on deals involving debt with portability clauses, in the hope they’ll ultimately lead to a bigger pipeline of work.
In the case of Techem, the company’s new owners — private equity firm TPG and Singapore sovereign wealth fund GIC — are seeking portability by asking lenders to waive a clause in the company’s €1.85 billion loans that would otherwise force them to put new debt in place after the deal closes.
Meanwhile, Bain Capital and Cinven just priced a €1.25 billion junk refinancing for Stada that also includes a specific portability clause, according to people familiar with the matter, who asked not to be identified because the details aren’t public. The private equity firms are currently in talks to sell the German generic drugmaker to buyout firm GTCR, although there’s still the possibility they’ll opt for an initial public offering of shares.
Specialty chemicals producer Nobian, owned by Carlyle Group and GIC, included a conditional portability clause in a recent amend and extend of its €974 million term loan B, according to a separate person familiar with the matter, asking not to be identified because the details aren’t public. Carlyle is exploring an IPO or sales process for Nobian, as reported by Bloomberg News.
Now that some of the biggest buyouts have proved a disappointment for banks, lenders are holding out hope for a role providing debt to back a buyout of Sanofi SA’s consumer health division — one of the most hotly-anticipated sales of the year.
Spokespeople for Stada, GIC, and Nobian didn’t respond to a request for comment. TPG, Bain, Techem, Cinven and Carlyle representatives declined to comment. Of the banks working on the deals, representatives for JPMorgan Chase & Co., Goldman Sachs Group Inc., UBS Group AG, HSBC Holdings Plc and Citigroup declined to comment.
--With assistance from Kat Hidalgo.
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