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Friday, 22 March 2019

Europe High-Yield Bond House: Deutsche Bank

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Unravelling complexity

Leveraged buyouts dominated 2018. But while many banks managed deals, just one was consistently there for the trickier names. For executing the most complex LBOs in a volatile year, Deutsche Bank is IFR’s Europe High-Yield Bond House of the Year.

Buyouts returned with a bang in 2018 after a relatively quiet 2017, with high-yield issuance volumes from M&A and LBOs reaching €13.35bn – more than doubling the previous year’s total.

Deutsche Bank executed more of those deals than any other bank.

According to Diarmuid Toomey, head of high-yield capital markets at the bank, sponsors’ tendency to go for big and innovative deals played right into Deutsche’s strength. “We feel we are uniquely positioned in Europe to support them from a high-yield perspective,” he said.

First in line was Danish telco TDC, in what was the largest public-to-private European transaction since the financial crisis. Deutsche got investors on board with a structure that would see TDC separate its network from its retail business, while selling its Norwegian assets. This required a lot of work with investors, given the rarity of the structure.

“It is one of the largest sponsor-owned subordinated LBO bonds and the largest this year,” Toomey said of the €1.05bn tranche of the deal, which also included a US$410m note issue. ”Other subordinated deals were around a third of the size of TDC, so it did require buy-in from the whole market in what was a very choppy period in June.”

In the same week, Deutsche managed to market an even more challenging bond sale for Cirsa Gaming’s buyout by Blackstone. The transaction raised €1.56bn-equivalent in euros and US dollars despite gaming sector risks and the poor trading performance of Cirsa’s main comparable Codere, which issued bonds in 2016. To get the deal over the line, Deutsche had to rejig the deal structure and offer heavy discounts on pricing.

“Given its size a lot of other people would have pulled that deal. I don’t think we would have been able to do it if we weren’t as aligned between Europe and the US across our businesses,” Toomey said.

Then in July came German metering company Techem’s buyout, one of the most highly levered deals the market had seen in a while. Deutsche got investors on board despite the fact that the deal documentation would allow Techem to incur further debt that could drive net leverage to nearly 10 times.

Where there was investor pushback, Deutsche managed to innovate. While a clause that would have allowed the company to pay dividends by investing in unrestricted subsidiaries that are not bound by the deal’s covenants that irked investors was removed, it yanked back flexibility by getting the company to make direct dividend payments at a higher leverage level than originally planned.

Despite the aggressiveness of the terms and a Caa1 rating from Moody’s that was lower than most issuers this year, the bonds ended up being priced tighter than the LBOs that had preceded it.

But the trade where Deutsche left its biggest mark came near the end of the year, and was for CVC’s buyout of Italian pharmaceutical Recordati. The €1.3bn dual-tranche deal was the largest ever Italian LBO, and came despite heightened anxieties around the country’s budget.

The deal financed CVC’s purchase of a 53% stake in the company, highly unusual given that this meant only just majority ownership. But the complexities didn’t end there. CVC’s purchase meant that it had to launch a mandatory tender offer on the remaining shares, leading investors to question the company’s ownership and the prospect of further indebtedness.

Deutsche also helped investors get their head around a subordinated note issue outside their reach, which would still be financed through the operating company, whose dividends the bondholders were reliant on for coupon payments.

In addition to the trades it led, Deutsche was also a global coordinator on the buyout financing for Flora Food – the carve-out of Unilever’s spreads business that was bought out by KKR. It also served as bookrunner on Akzo Nobel’s speciality chemicals business buyout by Carlyle, and the buyout by Blackstone of Thomson Reuters’ Financial and Risk division, which includes IFR.

To see the digital version of IFR Awards 2018, please click here.

To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

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