Cheaper euros trump dollars for leveraged loan borrowers

By Claire Ruckin

LONDON (Reuters) - Leveraged loan borrowers are increasingly opting to raise euros in preference to dollars taking advantage of the tighter terms on offer in Europe’s loan market and investor appetite to lend.

The European loan market has traditionally lagged behind its US counterpart, which fulfilled the needs of US borrowers and lured European companies to the larger, more liquid and entrenched market that historically offered lower pricing.

But the US loan market is starting to lose some of its appeal as regulators get tough and impair lenders’ ability to offer financings that fulfil borrower’s needs, unwilling to lend in excess of six times leveraged or an amount that a borrower would be realistically unable to repay half of, within seven years via cashflows.

The US is also losing its edge amid tighter US monetary policy which will push interest rates up while quantitative easing in Europe will drive down European yields as rates stay low.

“Europe is more attractive, that is a function of where the markets are right now. It won’t necessarily continue. Part of it will be driven by QE and we will have to see how that unfolds but QE will drive European yields down and create a hunt for assets in Europe and in euros,” a loan banker said.

Investors in Europe also have a lot of money to put to work with a number of new credit funds, CLOs and repayments to existing funds. Borrowers are taking advantage of the situation, which has been exacerbated further by a lack of deals coming to market.

“Europe is definitely in vogue. It’s as cheap as chips,” a second loan banker said.

SWITCH OVER

A number of deals are reflecting borrowers’ growing favour for euros and some loan financings look different to what they would have done if they were in the market six months to a year ago, when dollars were more attractive.

Swiss chemicals company Ineos has raised a 1.4 billion euro-equivalent ($1.48 billion) leveraged loan to refinance its 500 million euro floating rate notes and $1 billion senior secured notes. The majority of the new financing, unlike the previous financing, is denominated in euros.

The loans include an 850 million euro tranche and a $625 million tranche. Pricing tightened to 325bp at 99.5 OID with a one percent floor from initial guidance of 350bp at 99 OID with a one percent floor.

The pricing achieved was far tighter than could have been obtained if the borrower opted to raise a majority or all of the loans in dollars, as the company arbitraged the transatlantic dynamic and leveraged off of the stronger euro market to get the best pricing, bankers said.

“Borrowers are raising euros, which is a reflection of the fact that the euro market is far stronger at the moment than the dollar market, in a reversal of where we were six months ago,” the first banker said.

US drug manufacturing firm Patheon has opted to raise an add-on facility denominated in euros to back an acquisition of IRIX Pharmaceuticals, despite the target company being headquartered in South Carolina. The 150 million euro add-on is guided to pay 350bp with a one percent floor.

In 2014, private equity firm JLL Partners, which owned a controlling stake in Patheon, acquired a majority stake in DSM Pharmaceutical Products, a unit of Dutch food and chemicals group Royal DSM and combined the businesses to form a new joint venture majority-owned by JLL. The acquisition was backed with a $985 million loan and a 250 million euro loan.

“Patheon is a global business so makes sense to have euros in financing mix. When it did its first deal in 2014, the dollar market was stronger so it did the majority of the deal in dollars but now the euro market is stronger,” the first banker said.

The strength of the euro market is leading some borrowers that would traditionally only finance in dollars to consider euros. There is demand from euro investors for this, especially on large deals, such as Dutch semiconductor company NXP’s $40 billion merger with US based Freescale.

(Editing by Christopher Mangham)