EMEA Leveraged Finance House
A partnership approach: The absence of jumbo buyouts over the last year has focused attention on Europe’s mid-market core. Here, ING’s partnership approach to sponsors and peers has kept deals flowing, despite the tough market conditions of 2008. The bank is IFR’s EMEA Leveraged Finance House of the Year.
The leveraged finance sector reverted to a largely mid-market dealscape in 2008. This meant that banks focused exclusively on the upper end of the market were relegated to an increasingly marginal role, that of niche players chasing a dwindling number of deals rather than drivers of the market.
Even if not quite happy about the state of the leveraged finance market, Paul McKenna, ING’s head of leveraged finance, is understandably proud of the resilience of the business built up by the bank over the last seven years.
Since the credit crunch first hit, commercial banks have stepped up to the plate, and none more so than ING. In the past such banks were sidelined from larger deals, especially when structures and documents proved too credit-dilutive for a credit-focused commercial bank.
In 2008, ING was well positioned to increase market share and take leading positions and co-ordinating roles in those deals the market was able to support. “Last year we blew up relationships with sponsors over issues like covenant lite, which we simply refused to do, but this year sponsors are talking to us as a bank still able and willing to lend,” said McKenna.
A consistently prudent lending strategy has kept the bank open for business despite the treacherous market environment, allowing it to support those deals which fit its preferred credit profile. As the leveraged finance market contracted, banks like ING, which were already successfully underwriting and syndicating debt across the mid-market and the lower end of the jumbo rage, continued to do deals.
Behind the contraction of the market in general, and especially bigger deals, was the flight of liquidity from institutional investors. The rapid deleveraging of all financial markets hit the CLO space especially hard. Big banks that had been staggeringly successful with an originate and distribute model, predicated on a big cadre of leveraged debt investors, were stopped in their tracks.
According to McKenna, ING’s flexible approach to underwriting partly explains its success in a tough market: “We can do sole underwrites, but equally we have done co-underwritten deals and club deals when that was the appropriate solution to support the sponsor,” he said.
At the heart of that flexibility is ING’s balance sheet, a function of the parent bank’s scale and solidity. Equally important is the bank’s partnership approach to dealmaking at all levels.
While some despair of the bank’s arcane modus operandi, a partnership approach has made Europe’s clubby banking atmosphere uniquely positioned to cope with this year’s horrific markets. Arranging banks have been able ignore European secondary market pricing and US comparables, at least to some extent, by feeding new vintage deals to regional commercial banks. Such banks are far more focused on credit than on price.
ING’s partnership approach is manifest at every level of its leveraged finance operation. The bank’s sponsor coverage model focuses on building and maintaining relationships with private equity partners in their home markets. It operates with a staff of more than 100, spread across 10 offices. They often cover mid-market sponsors, and foster dialogue and relationships with players that many of its competitors ignore. Crucially, ING’s team is capable of widening regional relationships across the continent, as sponsors broaden their scope.
The combination of a pan-European bank with a local network means that ING’s leveraged finance team can communicate local market insight and sector specialism back to its central office, which in turn is attuned to pan-European players, innovations and strategies.
That kind of insight was crucial to winning smaller deals like the €190m financing package backing Lion Capital’s buyout of Ad van Geloven. “ING played an important role in securing financing for the acquisition. Their knowledge of the company, their expertise in the Benelux debt market and their speed and the quality of their execution were very valuable,” said Andreas von Paleske of Lion Capital.
Others agree with that assessment. According to Soren Christianson of Cinven, “ING were very important to financing Cinven’s €533m acquisition of Jost. As incumbent debt arranger, we found their knowledge of the company, management and the existing banking syndicate to be of valuable importance to us.”
Equally crucial to the bank’s success in 2008 was ING’s rapport with its peers in the banking community. “We are syndicating debt to banks that share our mentality when it comes to debt. In fact, the first bank we have to sell any deal to is our own credit committee,” said McKenna.
This networked approach to bank coverage has enabled ING to remain plugged into the regional bank investor market. This was instrumental in securing regional buyers for deals like Averys, Photonis, Ad van Geloven and CEME. And while the bank has long been able to tap that market, the importance of its privileged access came to the fore this year as alternative sources of liquidity dried up.
A willingness to do club deals and engage in club-like structures requires banks to commit to large hold positions, relying on limited or non-existent syndication. The model de-risks deals for underwriters, taking away the pressure to sell down positions – especially when pricing is difficult to gauge.
For banks though – particularly those at the top of a club – the practice of de-risking means having to share lucrative arranging and underwriting fees with the rest of the club. That has led some banks to forswear the practice altogether. But ING’s experience in 2008 suggests that sponsors are happy to remunerate any bank prepared to support deals: fees have ticked up from 3% to 5% over the course of the year. Banks capable of participating in such deals can therefore still make money.
Successfully executing such deals remains tough. It demands co-ordination skills from banks in leadership roles, and both the willingness and the ability to engage in constant dialogue with counterparties. Sponsors with ambitions to do deals have proved themselves able to work with clubs.
For the time being the business model of the old investment bank class is broken. The originate and distribute model is no longer a viable strategy for the bulk of deals, not least because it can fatally undermine confidence in secondary pricing. Banks like ING that have been engaged in multiple deals in 2008 have had to adapt to a market where nothing is unthinkable. ING has been willing, for instance, to split fees not only with club members but also with mezzanine investors, to bring them into deals early. This has ensured LBO debt is placed, regardless of how it is underwritten.
Carlos Aguiar of 3i explains: “3i underwrote the whole financing package in the purchase of (Spanish undertaking business) Memora, and we turned to ING to co-ordinate a group of lenders because of the their local market leadership and in-depth knowledge of the business. Their role was fundamental to the successful placement of debt in very difficult market circumstances.”
ING’s market position has not come out of the blue. The bank rode the rising tide of the LBO market in recent years, building up a franchise from something close to a standing start, with just four bookrunner roles in 2002, worth a total of less than €500m. Now it is among the most active and successful bookrunners of 2008.
While remaining committed to the mid-market, ING’s total value of deals rose dramatically in 2006. The bank won not just more roles, but roles on far larger deals – for example, the €4bn of debt backing the LBO of Kabelcom and the US$1.67bn facilities for VNU. These took the firm’s total volume of debt underwritten in 2006 to €20bn.
Since then the total of debt underwritten has fallen off, to around €15bn last year and just over €10bn up to mid November in 2008. However, unlike many of its rivals, ING continues to underwrite deals in volume. From eight deals in 2003, the bank’s deal volume grew to 13 in 2004, 19 in 2005 and 22 in 2006. The rise peaked with 24 deals in 2007, a particularly impressive tally in a year that for many banks included only six months of true risk appetite, before falling back slightly to 23 in 2008.
While remaining capable of bringing large deals such as Rexel to the market in 2008, ING’s core strength is its market-leading share of the sub-€1bn debt segment.
The bank’s activities in 2008 were concentrated on smaller, more regionally-focused, buyouts, where syndication could be done quietly. This kept it out of the maelstrom that hampered larger, cross-border transactions.
By and large, the bank’s 2008 tally shows an appreciation of credit and a selective approach to sponsors and sectors. That selectivity allowed ING to keep working right up to year-end, in contrast to some of its peers that lent heavily at some points in the year, before their appetite waned in the last two quarters.
Donal O’Donovan