Sunday, 16 December 2018

Europe High-Yield Bond: ICBPI’s €1.1bn payment-in-kind bond

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PIK of the bunch

Peripheral European banks’ need to sell down non-core operations has presented an unmissable opportunity for private equity firms. But working out how to finance these assets in the capital markets is easier said than done and, for buyers, funding costs are a key driver of valuations.

Advent, Bain Capital and Clessidra’s acquisition financing of Italian payments business ICBPI has shown a way forward, while also demonstrating that the PIK market is wide open in Europe – for the right credits.

The Bank of Italy regulates ICBPI, meaning the buyers had to raise debt at a holding company above the business. To further put the regulator’s mind at rest, the €1.1bn debt raise was structured as a PIK toggle bond. This structure allows issuers to pay coupons with more debt if they do not have enough cash, to the chagrin of many fixed-income investors.

PIK deals have been thin on the ground since Phones 4U’s PIK was wiped out in September 2014. When banks underwrote ICBPI’s deal in early June, the only PIK to price in euros in 2015 was a small €125m deal for German family-owned firm Progroup.

In contrast, ICBPI’s €1.1bn size made it the largest euro PIK toggle to-date.

The underwriters always knew there would be a long lead time before the deal could be launched for syndication, but by the time it finally emerged in November credit markets has whipsawed dramatically, with US high-yield seeing a particularly savage sell-off.

Despite credit market jitters, leads still sold the 5.5-year deal within cap rates, with a €900m fixed-rate tranche at par to yield 8.25% and €200m of FRNs at Euribor plus 800bp at 99.

The fixed tranche did come at the wide end of 8%–8.25% price talk, and wider still than high 7% whispers, but market participants said it was still an impressive result.

“If you told me back in August that this would come around 8%, I would not have believed you,” said a syndicate banker. “Hats off to them.”

Goldman Sachs’ EMEA leveraged finance origination head Littleton Glover described the deal as the bank’s “most challenging this year”.

“You had to get people comfortable that the PIK will be serviced in cash, but to do that you need to help them get their heads round things like CET 1 ratios,” he said. “This is not your daddy’s Vauxhall.”

Global coordinators were Goldman Sachs, HSBC and JP Morgan, while joint bookrunners were Bank of America Merrill Lynch, Citigroup, UniCredit and Nomura.

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