Are European investors risking an overdose?

There were no shortage of takers for the debt financing backing the buyout of German drugs firm Stada, despite concerns over the structure.

When Bain Capital and Cinven finally agreed the €4.1 billion takeover of Stada in August – in the process completing the largest leveraged buyout of a European listed company during the last four years – those involved in the deal may have needed to ask the German drugmaker for some calming medication.

The bid had dragged on for months and hedge funds took advantage the delay and used regulation designed to protect minority shareholders to ratchet up the price. Suffice to say, when drawing up the regulation, it’s unlikely that those responsible envisaged hedge funds as the main beneficiaries.

But while the deal reminded the market of some of the difficulties associated with German public-to-privates, it gave no indication of any loss of appetite in the financing markets. According to reports, the high-yield bond element of the financing was subscribed multiple times over.

“If investors find an asset that they feel they have to be part of, they will pile in.”

David Slade

At a leveraged finance seminar organised last week by UBS – one of eight co-leads on the debt financing of Strada – David Slade, the bank’s global co-head of leveraged finance and leveraged capital markets, said: “If investors find an asset that they feel they have to be part of, they will pile in.”

Buoyed by the presence on the deal of two blue-chip private equity names, investors did not hold back – and this was in spite of a highly controversial covenant which allowed debt to be incurred at the parent level and used for any purpose (including a dividend payment to the sponsors) without being constrained by the restricted payments covenant.

“There is little doubt that the covenant package [in Stada] pushed the edge of what has in recent months become a very flexible envelope.”

Debt Explained

“There is little doubt that the covenant package [in Stada] pushed the edge of what has in recent months become a very flexible envelope,” said leveraged finance data specialist Debt Explained in a recent examination of the deal. However, the same analysis also said that, while the package was “aggressive” it was also “not unprecedented”.

One question posed at the seminar, in light of the pricing and structuring of Stada, was whether European investors are perhaps becoming too excited at the prospect of deploying a material amount of capital when a mega-deal comes along – and are, in the process, losing their discipline.

Stada was compared with a $7.25 billion deal at Avantor, the US life sciences business owned by New Mountain Capital. In this case, the debt financing – led by Goldman Sachs – saw numerous revisions as investors pushed back against the structure of loans and bonds backing Avantor’s proposed acquisition of a much bigger company, VWR.

The Financial Times reported that changes to the Avantor deal included stricter limits on the amount of debt the firm could raise in the future, as well as restrictions on the ability of private equity owners to take out dividends.

“US investors have always had more discipline,” Slade reflected. “There are quite a lot of deals in the market at any one time and investors can say ‘if you don’t give me what I want, I’ll go somewhere else’. In Europe, when a big deal comes along, investors take the view that they have to be in it.”

The view at the seminar was that Avantor is something of a canary in the mine. With so much liquidity, liberties are being taken – but the deal provided a clear indication that investors in the US will not put up with anything. Although Goldman got the financing off its books (observers say it’s only a ‘hung’ financing that would produce a major market wobble), concessions had to be made.

In Europe, meanwhile, investors are keenly awaiting the next opportunity to feast – with the financing for Hellman & Friedman’s $5.3 billion bid for Danish payments firm Nets now a major focus of attention. Investors are no more likely to take flight than the poor canary in its cage.