The equity syndication for the buyout was a model of speed and efficiency. After initial due diligence by Silver Lake and KKR, potential co-investors were given just two weeks to get comfortable with the company and its valuation. This process brought in three investors, leaving room for two more. The latter were given just 48 hours to come to a decision. Goldman Sachs and Providence Equity sprinted to the table in the nick of time.
While the speed of equity syndication impressed observers, the ability to raise the required debt finance for the second-largest buyout of all time was questioned. Fears were compounded when, one month after the deal was announced, the high yield market in the US was suspended amid uncertainty surrounding the potential impact of credit rating downgrades at Ford and General Motors.
But since the market reopened in June, sentiment has changed dramatically. So much so, that Sungard’s high yield offering made the equity syndication for the buyout look ponderous by comparison. Originally planned as a $1.25 billion offer, it was initially hiked up to $2 billion (eight-year senior notes, comprising $1.6 billion fixed-rate and $400 million floating rate), before an extra $1 billion of ten-year senior subordinated notes were tacked on just hours after the pricing of the first two tranches. In early trading, all three tranches were advancing strongly and the sceptics therefore retired to the shadows.
In Europe meanwhile, the underpinning of LBOs by extraordinary liquidity in the debt markets has been gathering momentum too. According to figures from Standard & Poor’s, leveraged loan volume in Europe in the first six months of 2005 totalled €56 billion, compared with €65 billion for the whole of 2004. This helps explain why Europe’s leading leveraged finance groups are staffing up: PEO this week for example reported Goldman Sachs’ hiring of Guy du Parc Braham as a senior originator from Deutsche Bank, hot on the heels of its success in luring Ian Gilday, former head of leveraged capital markets at Merrill Lynch, just two months previously.
But in Europe, as in the US a few months ago, there are clouds on the horizon. Some practitioners say overly aggressive recapitalisations are challenging the appetite (as well as the patience) of the syndication market. Loans recently issued in support of private equity-backed companies Debenhams and Amadeus Global Travel Distribution are among those currently changing hands at a marked discount to face value.
This is unfortunate timing for Wind, the Italian telecom company that was acquired by the Weather Investments consortium for a mighty €12 billion in May. The firm’s issuance of €6.85 billion of senior loans – being handled by lead arrangers ABN Amro, Deutsche Bank and San Paolo IMI – is being seen as a critical test of the market’s appetite to swallow ever-larger chunks of buyout debt.
There is every indication that the test is proving a challenging one. Sources close to the syndication say the sheer size of the deal combined with unfamiliarity with Egyptian entrepreneur Naguib Sawiris, who led the transaction, have combined to lengthen the placement process. As a result, extra fees have been offered on some of the senior tranches and, this week, the margin on a €700 million second-lien loan was upped by a further 100 basis points. Given the popularity of second lien loans with hedge funds and other asset hungry investors, the fact that Wind is now offering a 625-point margin over Euribor (compared with a typical 425 basis points) suggests that the market is obliging the transaction’s underwriters to go the extra mile.
Hopes for the success of the Wind syndication remain high nonetheless, and any predictions of the European market’s imminent collapse would rightly be regarded as rash. However, there has been a shift in the balance of power. While the debt markets remain strong on both sides of the Atlantic, European investors are dropping hints that for the required momentum to be sustained, the price must be right.