Mechanical drives business Flender has introduced a green element to a €1.3bn buyout financing backing its acquisition by Carlyle, meaning the deal is set to be the largest ESG-linked loan in the syndicated Term Loan B market, and underlining the growing use of sustainability criteria in leveraged deal structures.
A sustainability-linked margin ratchet applies to a €1.045bn seven-year covenant-lite TLB, which is offered to pay 375bp over Euribor, with a 0% floor at 99.5–99.75 OID.
It will see margins going up or down by 10bp depending on the company’s installed amount of wind power. If the performance figure grows by 5% or more, Flender will get a 10bp margin reduction, and vice versa.
If it benefits from a reduction, Flender, which supplies gearboxes, generators and services for wind turbines, will donate half of the margin savings to charity.
“The business of Flender obviously has a green angle by producing wind power in the first place, so having a green ratchet on top makes a lot of sense,” said a syndicated loan head.
Leveraged loan investors are increasingly open to ESG-linked pricing structures, due to the increasing awareness of ESG from their own investor base. The economic impact of the margin ratchet is still narrow and therefore unlikely to act as a deterrent.
“I think 10bp is tolerable. Almost all CLO managers are focusing on ESG generally,” the syndicated loan head said.
The deal is the latest sustainability-linked TLB after French food safety provider Kersia bundled ESG elements into its well-received €520m leveraged buyout loan in November. The margins of that deal will go up or down by 5.0bp–7.5bp, depending on the firm’s implementation of systems for collecting and recycling empty packaging from customers; its share of green products; and the percentage of employees given the opportunity to become shareholders of the group.
Carlyle has also previously introduced ESG into the leveraged loan market. In June, Carlyle-backed plastic packaging company Logoplaste amended a €570m leveraged loan financing to become the first ESG-linked loan to test Europe’s institutional investor base. Margins went up or down by around 5bp–10bp, depending on the reduction of CO2 emissions.
Another Carlyle-owned business, Jeanologia, a Spanish maker of denim manufacturing equipment, in 2019 linked the margin of its buyout loan to water savings, though that was a club deal held by a handful of commercial banks.
Also in 2019, Spanish telecoms operator Masmovil became the first European issuer of leveraged debt to incorporate an ESG rating. The ESG rating was only linked to a €250m revolving credit facility and capex line, rather than incorporating the term loan too.
Flender's financing also includes a €125m 6.5-year senior secured guarantee facility and a €150m 6.5-year revolving credit facility. The all-senior secured financing will have leverage of around 4.5 times.
The loan, which is the first leveraged buyout out of the blocks this year, is offered with 101 soft call for six months.
Expected ratings are B+/B1/BB–, with a stable outlook.
Bank of America, Deutsche Bank and UniCredit are physical bookrunners, while RBC, Commerzbank and Goldman Sachs are bookrunners and mandated lead arrangers.
Mandated lead arrangers are Bank of China, as sole lead China arranger, and NH Investment & Securities, as sole lead South Korea arranger. Other mandated lead arrangers are Helaba, MUFG, SEB and SMBC.
Bank of America and Deutsche Bank are sustainability arrangers.
The sale of Flender is the latest step in Siemens' effort to slim down its business to focus on factory automation, transportation and smart buildings after floating its turbines and generators supplier Siemens Energy in September 2019 and spinning off its Healthineers division in 2018.