Making the right calls
The European leveraged finance market started the year with talk of jumbo buyouts. That all changed from February when market liquidity cratered and many banks found themselves stuck with highly leveraged M&A debt with nowhere to place it. For its ability to guide issuers and investors through challenging markets, Deutsche Bank is IFR's EMEA Leveraged Finance House.
While most years in leveraged finance are all about the deal roster, 2022 was more about the buyouts that banks managed to dodge. While other levfin desks ended the year nursing millions of euros in losses, Deutsche Bank's cautious approach to risk saw it end up less bruised, while still supporting its clients.
"We started seeing the market moving away earlier and as a result were more selective than our competitors," said Hoby Buvat, Deutsche's head of European leveraged finance.
As well as minimising its underwriting losses, Deutsche also adapted its playbook to guide clients through a market which was experiencing large swings in risk appetite. To top it all off, Deutsche didn't pull a single deal, a major feat in a volatile market.
"We took a step back when the market was at its worst, but we were also active across all of the themes of the year: access to market for refinancing, liability management and strategy transactions," said Diarmuid Toomey, head of strategic capital markets.
Liability management for issuers was crucial in 2022 thanks to the dysfunctional new issue market. Deutsche led the way, most notably as one of two lead dealer-managers on German pharmaceutical company Stada's €1.385bn exchange offer for its 2024 high-yield bonds – the largest high-yield corporate exchange offer since 2018.
Under normal market conditions a refinancing would have been straightforward, but the lack of liquidity meant that option was too expensive. The challenge was the sheer size of the maturity wall: Stada had €1.885bn of its 2024s outstanding.
An exchange was seen as the most prudent course of action for the company. Deutsche made the call that the issuer should pay investors eight points upfront as an incentive and the decision paid off: while the minimum acceptance amount was set at €500m, investor demand meant the take-up was over €1.4bn, with a final exchange total of €1.385bn for the new 2026 notes.
"The exchange was critical, and had a real impact in the market in terms of changing investor perceptions as to the feasibility of the cap structure," said Luca Laino, a managing director in Deutsche’s leveraged debt capital markets syndicate desk.
Deutsche also backed chemicals giant Ineos when it looked to extend its March 2024 term loan B by 3.5 years. To win the deal, Deutsche pitched a very detailed analysis of Ineos's CLO investor base to determine whether the CLOs could extend.
On that basis, the Ineos deal, which completed in November, was structured to offer a cashless rollover with no early repayment option, allowing CLOs nearing the end of their reinvestment periods to roll into the new deal without any cash changing hands. Without such a structure that cash would have had to be returned to their investors. Lenders were given the option of either remaining in the existing short-maturity tranche with a low margin, or exchanging into the longer-dated higher margin tranche.
The transaction was a success. Ineos was able to upsize its A&E to €2bn-equivalent from €1.15bn at launch, making it the largest publicly syndicated deal for six months in Europe. The euro tranche doubled in size from €400m and reverse-flexed from initial price talk of 400bp–425bp over Euribor at 95–96 to 400bp at 96.5 despite constrained liquidity. Deutsche was global coordinator.
Deutsche was also a global coordinator in September on Apollo-owned Lottomatica's €350m high-yield notes – a deal which ended nine weeks of inactivity in Europe's junk bond market. The deal was notable because Lottomatica was asking investors for M&A financing for targets that weren't yet identified.
"Ultimately, what Lottomatica cared about was our knowledge of the investor base. We were pricing a deal in a high-yield market with an extremely flexible feature," said Buvat.
The deal was structured to include an escrow mechanism, where the funds would only be released if the borrower met certain conditions.
For tricky M&A financings, Deutsche turned to pockets of liquidity away from the traditional buyer base. Those connections came into play over the summer for Ivirma's €800m financing to support its buyout by KKR. The deal was underwritten after Russia’s invasion of Ukraine as a bank-syndicated deal, but after the market worsened, leads decided to go to direct lenders.
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