Engineering prepares M&A financing

IFR 2482 - 06 May 2023 - 12 May 2023
4 min read
Jihye Hwang, Robert Hogg

Engineering Group is preparing to return to the bond market with a €385m five-year non-call two trade that will be used to repay a bridge facility taken out to acquire consulting firm Be Shaping The Future.

The Italian IT company (B2/B–/B+) started investor calls on Thursday arranged by joint global coordinators BNP Paribas, Deutsche Bank and IMI Intesa Sanpaolo and passive bookrunners Banca Akros, Credit Suisse, Nomura and UniCredit.

The potential trade comes as the high-yield supply finally got off to a start in late April, though the majority of the issues were refinancing maturing debt.

"We started the year by seeing a number of refis and now we are seeing new money," said a leveraged finance banker. "[Centurion, the issuing entity,] has a bond outstanding but this is new money to be raised in fixed-rate format."

Engineering signed an agreement last June to buy a stake equal to around 43.2% of Be Shaping The Future that will consolidate the group's role as a strategic digital transformation services provider for financial institutions. Engineering is owned by Bain Capital and NB Renaissance, part of Neuberger Berman.

Although M&A can reduce the cash available to service debt, the company has a history of substantial M&A activity due to the presence of PE funds, while also being a leading player in the Italian IT services market, supported by high barriers to entry, said Giacomo Bergamo, credit portfolio manager at Ver Capital.

"The growth potential of that market is fostering opportunities in the future and it has diversification of activities in Italy, given the different industry verticals the group operates in," he said.

"The top 10 customers generated 30% of the company’s revenues, however, the group has a good tenure with customers of approximately 10 years. The group is subject to stringent regulation in the government projects and awarded contracts in which it participates."

Although, from an issuer's perspective, printing the new bond in a floating-rate format may look like a sensible decision given market expectations over interest rates being close to peak levels, there is a lot of downside risk in a floater, said the banker.

"The liquidity pool to go into FRNs is lower than fixed-rate," he said, adding that it is about 50bp cheaper these days to print a bond in a fixed rather than floating-rate format.

"CLOs are the main buyers of floaters and have buckets for them, but the biggest chunk of their money is for term loans. It wasn't an issue in 2021, as there was an abundance of cash and liquidity, but right now investors are zoning off the instruments and credits they look at."

Bergamo, though, sees opportunity in floaters. "We still have a preference for floating rates because these are more stable from a mark-to-market perspective, having less volatility," he said.

"We [also] prefer issuances in the Double B space that have a near-term maturity. The credit curves are still flat and you can lock in good yields, even in the short-term part of the curve."

The senior secured notes have expected ratings of B2/B–/BB– and will be issued through Centurion Bidco.

The company last visited the bond market in October 2020, according to IFR data. It raised €605m from a 6NC2 note that was backing its buyout by Bain Capital and Neuberger Berman. Then, the bonds came around three months after the company pulled its first attempt in late June on reports that some of its executives had been arrested by Italian tax police for alleged bribery.

S&P downgraded Engineering's rating to B– from B in December, citing a weakness in the company's governance structure and risk management. In November, it disclosed an accounting error in its finance vertical, with a revenue overstatement of €17.4m in the first nine months of 2022 and an accumulative current assets overstatement of €44.6m, according to the ratings agency.