Leveraged Loan House
A rising star: It is not easy to be a newcomer. Gaining market share can involve being aggressive, pushing the limits of pricing and structures and adopting practices that could upset your peers. But that is exactly how Barclays Capital tackled the leveraged loan market in 2010. For its determined push, fearless execution and client focus, Barclays Capital is IFR’s Leveraged Loan House of the Year.
Barclays Capital bought Lehman Brothers’ assets in the US in late 2008 and was able to spend the next 18 months allocating manpower and resources to build a new and merged global corporate and investment banking business, free from the credit crunch hangover that constrained many of its rivals.
Flash forward to late 2010 and the combined firm is a force to be reckoned with, as the fourth-largest arranger of leveraged loans globally after completing US$23.47bn of deals in the year to mid-November and entrenching a position as an up-and-coming rival for more established players.
Barclays achieved a consistent performance globally in leveraged finance in 2010, which leaves it well positioned going into 2011. The bank broke into the top five in the US for the first time in 2010 and improved its position in EMEA - where it was placed third with US$4.87bn of deals - and Asia.
“When it comes to creative financing solutions across the spectrum, whether it is between loans and bonds, Europe and US, seamlessness between origination and distribution and getting tough deals done, I don’t think there’s anybody better,” said Peter Toal, Barclays’ head of leveraged capital markets for the Americas. “We are up-and-coming and our market share is going to continue to improve.”
Back to life
Barclays’ priority was building its profile and business in the large and active US leveraged loan market, which sprang back to life in the first quarter of 2010 as activity remained muted in Europe and Asia. But the roll-out of the bank’s M&A advisory business in Europe and Asia also yielded dividends and mandates on some of the region’s top transactions.
Barclays runs its leveraged business on an integrated global basis in which the lines between loans and bonds, Europe and US were blurred in a year characterised by the bank to bond refinancing trade in the US and Europe and transatlantic and even global cross-border deal execution on larger corporate acquisitions and buyouts.
“In 2010 our goal has been really optimising the platform and having a differentiated position in acquisition finance from a global perspective. Not just a US offering or a US and European offering, but a global leveraged finance offering. The momentum of the business had been tremendous,” said Joe McGrath, the firm’s head of global leveraged finance.
The world class capabilities of the firm translated into top-notch execution of some of the year’s largest cross-border leveraged corporate M&A transactions, such as the US$3.05bn financing that backed Phillips-Van Heusen’s €2.2bn acquisition of Tommy Hilfiger. Barclays and Deutsche were global debt co-ordinators of the financing package that was launched to US and European investors in New York and London in March and April.
The cross-border cross-sell worked in both directions. The €1.72bn senior and mezzanine facilities backing the buyout of Germany’s Springer Science & Business Media, which reopened the institutional primary market in Europe, was also sold in the US along with £1.27bn of senior and mezzanine facilities backing the buyout of RBS’s credit card processing unit, RBS WorldPay, which was the largest fully-syndicated new LBO of the year.
In Asia, Barclays led the region’s largest LBO financing in the form of A$1.55bn in senior credit facilities funding Carlyle and TPG’s leveraged buyout of Australian healthcare operator Healthscope, which is IFR’s Asian Loan of the Year. Barclays also acted as M&A adviser, financing co-ordinator and bookrunner on the deal, which was the largest Australian financial sponsor LBO since 2008 and the largest Asia-Pacific (ex-Japan) LBO since 2008.
Investors have taken notice of the bank’s efforts as Barclays’ combination of commercial and investment-banking nous has created a powerful underdog pushing to increase market share.
“Barclays is the up-and-comer and they are in the mix. They went from nowhere to the middle of the pack in the top-tier. That’s pretty impressive,” a US investor said.
Audacious US drive
The bank used a three-pronged strategy to win market share and establish its name in the dominant US market. The strategy paid off handsomely. In the US, in the year to mid-November 2010, Barclays participated in 74 deals with bookrunner volume of US$17.92bn, compared with 40 deals totalling US$10.05bn in full-year 2009.
First, it stayed close to the market through its sales and trading platforms and maintained a close dialogue with investors, which helped to create better solutions for clients and allowed the bank to get a better feeling for the market and gauge its own risk.
Second, the bank also used its award-winning research capabilities to provide first-class content and to differentiate its offering and approach to clients with new ideas. Third, it focused on pushing for more new issue product.
That approach put Barclays in a leadership role on 20 of 22 US LBOs of more than US$1bn, which are a roll-call of the biggest leveraged names of the year – IMS Healthcare, Tomkins, Burger King, NBTY, Interactive Data, Multiplan, RBS WorldPay, Busch Entertainment, JohnsonDiversey, Michael Foods, TASC Advisory, Transunion, Styron, Fairmount Minerals, DynCorp International, Hillman, Vertafore, American Tire, SkillSoft, RCN, Sedgwick and Bway Holding.
To play in the US leveraged corporate market, Barclays had to deploy capital to rebuild lending relationships because it was unable to pick-up Lehman’s lending positions as most of those holdings were transferred post-bankruptcy to the Lehman estate. However, the bank still managed to land lead left roles in corporate acquisitions such as Fairmount Minerals, MedAssets, Ocwen Financial and Phillips-Van Heusen.
Barclays also pushed for a left lead on refinancings such as Brickman Group, DineEquity, Wyle Services, Pinnacle Foods, CHG Healthcare Services, GGP, Aurora Diagnostics, Radnet, Great Point Power and Spansion.
In Europe, Barclays led a large and logistically challenging US$6.75bn leveraged refinancings for chemicals firm Ineos Group and Kerling Group in May 2010. But pushing into the top five in the US wasn’t easy, especially given the well-established market breadth of its rivals.
“It’s been a huge rebuilding effort that is only just now starting to pay dividends. When you look at us versus JP Morgan or Merrill we have been fighting with one hand behind our back,” said Tim Broadbent, head of the US leveraged loan syndicate.
The bank’s strength with private equity sponsors was particularly notable in a year when the LBO market was finally rekindled. The bank combined balance sheet with market advisory roles in an aggressive push that pleased sponsors.
“After the integration we kept most of our senior sponsor coverage. Most other firms cut back. So, when the market reopened we were very good on the sponsor side. We were then selected to drive transactions and invited to take advisory roles,” said McGrath.
Offering aggressive pricing and/or structures that put clients first in order to cement relationships wasn’t always a popular choice among peers, but it did endear the bank to the private equity community and also showed conviction and a knack for calling the market correctly, as the high-yield markets moved in favour of the bold in the second half of the year as liquidity deepened.
“Barclays were never irrational – they were aggressive, and that’s not a bad thing,” a private equity sponsor said.
Barclays’ strategic decision to make calculated risks to get access to the private equity firms caused some pushback on aggressive deals, including a dividend deal for mobile phone customer support services company Asurion that widened its OID and flexed pricing to get investors over a reluctance to backstop at aggressive levels with no covenant or economic flex.
“Barclays was either lucky or right that the market stayed strong. Had they been that aggressive and the market had weakened, they would have taken a lot of pain,” a US investor said.
When it comes to the secondary market, Barclays is a force to be reckoned with across the world. It is putting resources behind its secondary trading desk in Europe, for example, in order to foster liquidity for the asset class.
Barclays’ secondary desk in Europe boosted its market share to 20% in 2010 from less than 5% the year before, trading cash loans totalling €12.2bn in more than 3,000 trades on 150 loans with 200 counterparties as the credit trading operation moved from 10th place to third, according to an independent survey.
If nothing else, Barclays seems to be rising among its rivals as the perfect combination of creativity and size and is now capable of competing globally.
“JP Morgan and BofA do a great job of utilising their capital, and taking that and their distribution and being the monsters of the pack. Credit Suisse and Deutsche Bank do a better job in taking a smaller situation and trying to come up with a better solution or an interactive structure and really doing something a bit more creative. Barclays does a bit of both,” a US investor said.
Michelle Sierra Laffitte
