A CONSERVATIVE FUTURE(3)

A reminder of the leveraged finance market's key characteristics prior to this summer: surging liquidity; borrowers in the box-seat; second lien allpowerful; capital structures risky; financial covenants a thing of the past.

And then along came the credit crunch and, pretty much overnight, the end of the world as debt professionals knew it.

Since then, amid the freeze (more or less) on large financings, thoughts have turned to what the LBO market will look like when it eventually springs back to life (as it surely will). In an effort to lift the fog, international law firm Norton Rose picked the brains of professionals within 100 banks, private equity houses, corporates and hedge funds to seek their views on what lies ahead.

If there's one word that appears to sum up the leveraged finance market of the future, according to the views of those canvassed, it's ‘conservative’. Perhaps the clearest illustration of this is the predicted revival of the good old traditional amortising A tranche (see chart 1). More than 90 percent of respondents believe that, when the market picks up, so too will this plain vanilla debt layer.

By the same token, some of those features of the leveraged finance market perceived to be at the riskier end of the spectrum are expected to be weeded out. Specifically, the use of payment-inkind (PIK) loans is predicted to fall by more than 68 percent of respondents (chart 2), while only 8 percent believe the exceptionally borrower-friendly covenant-lite loan will continue to be a feature of new deals (chart 3).

Risk-averse or otherwise, perhaps the most pressing question is: When does the market get back in full swing? Best not think short term. Nearly half of those surveyed believe it will take more than a year to return to Q2 2007 levels (chart 4).

ENTERPRISE POSTS 10X RETURN ON MAGELLAN
Polish private equity firm Enterprise Investors has floated financial services company Magellan on the Warsaw Stock Exchange making a ten times return on its original investment, raising $13.5 million (€9.6 million) from the 20 percent stake it sold on the public markets, according to a company statement. Magellan also raised nearly $7 million to finance the growth of its loan portfolio. The buyout firm sold 1.3 million shares at PLN42 per share. The stock debuted 7 percent above the offer price. The buyout firm will keep 76 percent of Magellan's capital, while four percent is retained by management. The float was three times oversubscribed. Magellan provides financial services to medical institutions. These services include financing of receivables, refinancing of liabilities, loans and guarantees. At the end of the first half of 2007 the value of the company's portfolio of assets grew 73 percent compared to the same period last year, while net profit reached PLN6.4 million representing an increase of 27 percent.

ALLIANCE BOOTS DEBT SYNDICATION HELD UP
The banks underwriting the remaining £8.25 billion (€11.9 billion; €16.8 billion) of Alliance Boots debt are considering retaining the tranche for up to a year, according to a debt markets source. The syndication suffered a double blow as ratings agency Standard and Poor's downgraded the company's long-term corporate credit rating and the rating for its senior and secured debt. At the same time the UK government cut the money it pays pharmacies for medicines by £470 million, according to UK newspaper The Times. “This will hold the debt syndication back for at least another three months. Some of the bankers have already said to us the debt may not be syndicated for up to a year. This deal is too big for the market and they don't want to embarrass themselves,” said a source at a leading debt provider, based on conversations with Alliance Boots' bankers. S&P downgraded Alliance Boots' credit rating from BB- to B- due to its highly leveraged business model. The ratings agency also took the decision to withdraw its rating of the company's £520 million of public debt. KKR agreed the £11 billion buyout of Alliance Boots in May this year.

SAINSBURY DEAL HITS PENSION SNAG
The Sainsbury family has issued a statement reminding the board of UK supermarket chain Sainsbury's and its suitor Three Delta, the Qatari investment company, that it will block any bid without an adequate pension settlement. The Sainsbury family has a stake of around 18 percent in the company, which constitutes a significant blocking stake. Three Delta's special purpose acquisition vehicle Delta Two has made an indicative bid of £10.6 billion (€15.3 billion; $21.5 billion), which is conditional on receiving 75 percent shareholder acceptance. The family members said in a joint statement: “We have consistently made clear the principles by which we would address any offer. Importantly, these include ensuring the pension scheme is properly looked after.” According to the Financial Times, Three Delta and the pension board are at odds over the cash settlement for the pension fund. Three Delta has apparently offered around £1 billion, while the trustees are holding out for approximately £1.75 billion.

KKR SIGNS TURKEY'S LARGEST DEAL
US alternative assets manager Kohlberg Kravis Roberts has made its first investment in Turkey, buying shipping company UN Ro-Ro, valuing the company at €910 million ($1.3 billion). KKR will acquire 97.6 percent of the shipping company's shares in Turkey's largest buyout led by a financial sponsor. This does not count Turkish pension fund Oyak Group's buyout of steel company Erdemir in a $2.96 billion private equity-style, leveraged buyout (€2.09 billion) last year. KKR entered exclusivity on the deal in August. However, it had acquisition financing secured before then. The deal's financing was raised before liquidity problems in the global debt markets effectively closed the leveraged loan markets, according to a source close to the bid.

EUROPEAN BUYOUT BOOM SET TO FALTER
The European buyout market had a record first half with deals totalling €91.8 billion ($129.6 billion), a 15 percent increase on the first half of 2006, according to the latest numbers from Nottingham University's Centre for Management Buyout Research. The UK is still the largest market at €35 billion, followed by France at €15.8 billion and Germany at €14.4 billion. Secondary buyouts were the most valuable source of deals in continental Europe at €20.2 billion and public-to-privates the most valuable in the UK at €20.7 billion. Mark Pacitti, corporate finance partner at accountant Deloitte, a sponsor of the report, said: “Although first half numbers are really strong, we are unlikely to see the trend continue in the second half. The current turmoil in the debt markets is having a major impact on big ticket deals across Europe, although mid-market deals of less than €500 million seem likely to be more resilient.”

MONTAGU SELLS IT COMPANY TO TRADE
UK buyout firm Montagu Private Equity has sold IT company Open International to the UK's largest private independent insurance company Towergate for £276 million (€381 million; $537 million). Open International provides IT to around 40 percent of the UK broker market and has strong partnerships with all major insurers. The company was purchased from Misys in March 2006 in a management buyout for £182 million. Under Montagu's ownership the business expanded with the acquisition of MI Limited for around £12 million.