European Leveraged Finance House
True grit - In a rollercoaster year Lehman Brothers proved its leadership mettle by tackling the biggest and most aggressive deals in the first quarter, before underwriting and selling down conservative structures in the fourth. For innovation and vision in the first half of the year, metamorphosing into commitment and determination in the second, Lehman Brothers is IFR’s European Leveraged Finance House.
In the first half of 2007 Lehman Brothers was ahead of the pack in pioneering borrower-friendly structures. In the second half, its underwriting of new deals highlighted its commitment to sponsors.
Lehman Brothers has carved a niche as a provider of financing to sponsors and corporate borrowers requiring complex deals unsuited to vanilla structures. Its successful record as a debt provider owes much to this general strength, evident in the strong overlap of M&A and debt financing roles.
In the first half of the year Lehman generated a string of deals highlighting its leading edge position: PagesJaunes and ProSiebenSat1, the largest public to private deals successfully syndicated in Europe; Intergen, the last high-yield bond priced in Europe in 2007; Bawag, a unique structure put in place to provide leverage for the buyout of a stressed financial institution; and BorsodChem, which pushed the borders of the leveraged finance market deep into Central and Eastern Europe.
Lehman Brothers has become a consistent top 10 bookrunner in Europe thanks to mandates won on a number of large and difficult transactions, rather than on a large number of transactions.
Commenting on this approach, co-head of leveraged finance Richard Howell said: “We have long been focused on building a franchise on qualitative rather than quantitative foundations. However, we’re now a much broader franchise than historically, without moving away from that quality focus.”
Bookrunners came into 2007 facing a hugely changed market. The liquidity build-up through 2006 changed the dynamic of how the market operated – rebalancing it in favour of borrowers.
“At the start of the year the appetite among investors meant bookrunners had to rethink how they arranged debt,” said Charles Pitts-Tucker, co-head of leveraged finance. “We responded with products like toggle mezzanine, holdco-opco structures and stretched senior facilities because they allowed ever greater flexibility to sponsors.”
Perhaps the most obvious impact of the liquidity surge was the scale of deals which could be achieved. Lehman Brothers was involved in the two largest LBO deals successfully syndicated in Europe ever: the €7.9bn of facilities backing the buyout of German media group ProSiebenSat1 and its subsequent merger with SBS, and the €3.9bn record French buyout of directories business PagesJaunes.
These deals were made possible by marrying structures capable of fulfilling legal requirements in Germany and France with the liquidity available in the first half of the year. The answer for both deals was an Opco-HoldCo structure robust enough to cope with changing circumstances in complex deals.
Both deals were made more difficult by the complexity of a variety of “moving parts”, the result of creating financing solutions to acquire initially unknown percentages of public companies via tender offers. In the case of ProSiebenSat1, the necessity to merge the acquired entity with a second business, within the same overarching financing structure, added another layer of complexity.
The deal was not only the largest LBO financing but also the largest Opco-HoldCo financing and the largest high-grade or leveraged German media transaction ever closed. Lehman Brothers was sole global co-ordinator on the ProSiebenSat1 financing, testament to its unique franchise.
When the market for large public to private deals does reopen, the structure and execution of these deals will provide the template others will follow.
Innovation
PagesJaunes and the €3.1bn package backing the buyout of Kion established a key trend by flexing out junior tranches in favour of stretched senior facilities. While aggressive, the deals met investor appetite for the credits being offered. Arrangers first won commitments then used the flex to find the true level of appetite and the most borrower-friendly structure.
The deals were executed in the first part of 2007 at a point when the leveraged finance market found itself in uncharted territory. An unprecedented flood of liquidity into the CLO space in particular changed not just the way deals were syndicated, but structured and priced. The market abandoned traditional structures and Lehman Brothers’ roles in driving market defining deals gave it a strategic advantage it used to great effect from January through to August.
While new money deals dominate Lehman Brothers’ roster it nevertheless had a key role in initiating the wave of repricings which swept through the market in early 2007.
It set the trend when it parlayed high secondary trading levels for Firth Rixson into a repriced deal that slashed 25bps from an existing revolver, term loan B and term loan C, 37.5bps from a second lien margin and 100bps off the cost of mezzanine debt. A raft of similar deals followed.
In the leveraged loan space Lehman Brothers drove a number of innovative structures – such as the toggle mezzanine tranches on deals for Dako and Klockner Pentaplast and stretch senior with mezzanine PIK seen in the march refinancing of 3i’s oil services/shipping operator Dockwise.
The US$680m deal took senior leverage of 5.1 times Ebitda to 5.7 times through the PIK – a difficult deal in it its own right due to the market sector. It proved the value of a low burden of debt servicing when Dockwise went on to successfully execute a reverse merger with bigger rival Sealift, followed by a recapitalisation.
In a year when many predicted the end of mezzanine as a debt class, Lehman Bothers ensured its continued availability as underwriter on four of the five largest mezzanine deals. It used mezzanine as a niche part of the structures backing the very largest deals, as well as ensuring sponsors could avail of the product on deals like the €1.9bn of bespoke facilities backing the buyout of Bawag PSK by Cerberus.
In the high-yield space the bank again pushed market boundaries. In June senior floating rate notes for Clondalkin were priced through the bank debt. In July, as the market retreated, Lehman Brothers (alongside Merrill Lynch) was bookrunner on Intergen’s mixed currency deal, proving a deal could be placed in the ebb as well as the flow of the market with a credit-based research-led story.
CME’s senior floating rate notes were the first Central & East European bonds priced without an emerging market risk premium. That was done by bringing in a broad investor base that looked beyond the emerging markets geography at the credit fundamentals.
The CME deal followed the €1.15bn financing backing Permira’s buyout of Hungarian chemicals company BorsodChem – a record Hungarian public to private deal which anticipated the eastward shift of the market. Lehman Brothers acted alongside HVB on the deal, which saw many investors entering the market for the first time. It priced at close to west European levels, and for the first time priced mezzanine for the region at under 1,000bp over Euribor.
Leadership
In its leadership in the second half of 2007 Lehman Brothers demonstrated the depth of its commitment to the market.
In October, with the market still reeling from the summer’s liquidity squeeze, Lehman Brothers, along with Goldman Sachs and RBS, relaunched the £955m refinancing of PHS Group which had been pulled from the market three months earlier.
The deal featured the original structure but was offered at an OID with a price talk range of 96.50 to 97.50, an attempt to find a market clearing price and bring clarity to the debate raging behind the scenes between sellside and buyside institutions.
Further underlining the commitment to sponsors and to keeping the European market open was the €900m underwriting of a facility backing Oakhill’s acquisition of Firth Rixson. The deal set a benchmark for new era terms and pricing, including an amortising tranche, a large equity contribution, blended margins of more than 300bp and significant mezzanine tranches offered with call protection.
Lehman Brothers is the only bookrunner across both the €650m senior and €250m mezzanine debt; GE Commercial Finance is joint bookrunner on the senior piece; and Lloyds TSB is MLA on the mezzanine tranche. At the time it was the largest new buyout mandated since the credit crunch in July and was launched to general syndication in November – one of a handful of deals allowing investors to access new era credits rather than legacy deals.
With gruelling market conditions set to continue into next year, Lehman Brothers will benefit from its proven expertise as an arranger of difficult deals. The market, in turn, will benefit from its willingness to drive the market, which it can do either through aggressive deals or a more conservative strategy.
Donal O’Donovan