In a high-yield market dominated by headline-grabbing LBOs, executing a challenging trade wasn’t enough to stand out from the crowd.
Italian pharmaceutical Recordati managed to be noticed, pricing in October the largest LBO out of Italy against a market increasingly spooked by the country’s budget drama. It achieved this despite presenting a highly complicated structure to an increasingly wary investor base.
The €650m seven-year non-call one floater and €650m seven-year non-call three fixed-rate notes were sold to fund the purchase of a 51.8% controlling stake by CVC, an unusually low stake for a buyout.
The notes, while senior secured, were issued by holding company Rossini, making them reliant on dividends from the operating company. But the structure also included €750m of subordinated notes issued to the Recordati family, outside the reach of creditors, but financed through the operating company, requiring additional flexibility in the documentation.
CVC’s limited stake also meant that the bond deal would be followed by a mandatory tender offer for the remaining shares. The sponsor agreed to offer the €28 per share implied by the price paid to the Recordati family, which was significantly lower than the share price at the time of the agreement and in line with CVC’s desire for a limited stake. However, Italian volatility pushed the shares near that mark when the deal was being executed, which meant uncertainty around the company’s future ownership structure and the potential for further debt.
Investors also had to grapple with a unique permitted sell-down clause to account for CVC’s limited ownership and facilitate its eventual exit. Another innovation was the holding company floater, given that the buyer base for those notes opts for priority debt.
“With this one, the beauty is in the complexity,” said Diarmuid Toomey, head of high-yield capital markets at Deutsche Bank, which led the deal as global coordinator with Credit Suisse and Jefferies.
Leads also managed to price such a complicated trade against a backdrop where the spread between Bunds and BTPs widened throughout marketing and reached its widest level since June 2013. The leads were vindicated as, while the Bund-BTP spread did tighten after Recordati’s pricing, the gains were quickly lost as the battle between Rome and Brussels only intensified thereafter.
The deal is promising for capital markets ahead.
“If we look at where the next stage for the M&A and LBO-related volumes are going to be, sponsors are looking at public-to-privates,” Toomey said.
“We’ve essentially created a new product. This deal is being used as a case study by not only CVC but a broad brush of our sponsor clients, who thought that the technology was extremely interesting.”