The normally staid world of leveraged finance in Japan could be set for a shakeup, with banks lining up a debt financing that could total as much as ¥6trn (US$38.6bn) to back a ¥9trn management buyout offer for 7-Eleven store owner Seven & i Holdings. If the takeover offer is successful from Ito-Kogyo, the second-largest shareholder of Seven & i with an 8.2% stake, it would be the largest ever MBO. And at ¥6trn, the financing would be the largest leveraged loan ever. Mizuho Bank, MUFG and Sumitomo Mitsui Banking Corp are in talks to back the MBO, according to people involved. It is far from certain that a deal will go ahead, however, as Canada's Alimentation Couche-Tard, owner of rival Circle K stores, has also made an offer for Seven & i. Both offers are under review by the company. Bankers in M&A and leveraged finance circles in Asia said funding would be needed from multiple sources and not just the three Japanese mega banks. “Even if the Japanese mega banks are flush with cheap liquidity, the size of the debt required is too big and will consume a lot of capital for the lenders,” said a senior loan banker at an international bank in Hong Kong. “Every deal size is doable these days as lenders are hungry for good quality assets,” said another senior loan banker in Hong Kong. “Various pools of liquidity would need to be tapped into and a combination of debt [loans and bonds] and equity in domestic and foreign currencies would be required.” According to a leveraged finance banker at a Japanese bank in Tokyo, subordinated and mezzanine debt providers, as well as a sizeable equity contribution, would also be needed to get the MBO over the line. Stretching leverage The identity of the equity investors in the MBO will also be crucial in drawing financing support. Strong strategic investors would need to come with deep relationships with banks that could attract more lenders to the financing. If one or more private equity firms is among the sponsors of the MBO, it could allow higher leverage multiples than are usual in the region. Leveraged financings in Asia have typically been structured with gearing of around four to five times as the bank-dominated market in the region is relatively conservative. However, domestic lenders in Japan participate in LBO loans with gearing multiples of around six times, although international banks are unable to lend at those levels. “If leverage is too high, it will be difficult for international banks to join the deal,” said the first banker in Hong Kong. “The underlying business is cash-generative. So a five times leverage multiple is possible.” A ¥6trn debt financing represents a leveraged multiple of slightly above six based on ¥976bn in Ebitda that Seven & i is expected to generate for the fiscal year ending in February. Past precedents The ¥6trn is significantly larger than the ¥1.4trn loan backing private equity fund Japan Industrial Partners for its LBO of Toshiba. That borrowing is the largest LBO loan in Japan and carries a gearing multiple of 7.78 times based on Toshiba’s Ebitda of ¥180bn for the year to March 2024. Toshiba’s loan has only managed to attract five banks so far as mandated lead arrangers, with syndication having been on hold for almost a year partly because of the conglomerate’s lacklustre financial results last year. SMBC and Mizuho have committed ¥441.4bn and ¥394.3bn, respectively, to the Toshiba deal, accounting for more than two-thirds of the financing’s term loan tranches – a ¥300bn amortising portion and a ¥900bn bullet piece. Sumitomo Mitsui Trust Bank, MUFG and Aozora Bank funded ¥188.6bn, ¥137.1bn and ¥38.6bn, respectively. The five leads are providing another ¥200bn commitment line on a pro rata basis. The outcomes of other high-profile LBO financings in Japan are also worth noting. In June

Additional Tier 1 bonds drew huge demand on Thursday as Deutsche Bank set a new euro order book record while NatWest Group broke through the US dollar market's 300bp psychological barrier and Societe Generale landed a US$1bn deal inside some estimates of fair value. The highly sought-after Tier 1 deals highlight a dramatic rebound in appetite for European banks' riskiest form of debt. The AT1 market had fallen quiet after a trio of bonds that priced in the last week of October encountered order book attrition and struggled to perform, as investors turned more circumspect in the run-up to the US presidential election on November 5. But primary market conditions rapidly improved after Donald Trump's clear victory. "It feels like [investors] have been caught offside by the cleanliness of the election result and the reaction in risk assets ... in essence people are just happy to add risk outright," said a syndicate banker. The three banks hit the market the day after an AT1 from Italy's BPER Banca. All four, some of which were said to have been considering parking their deals until January, were convinced the time was right to return to AT1. "We came from a backdrop that was definitely negative for AT1s pre-election and we downgraded our expectations of opportunistic AT1s," said a second banker. "But then looking at the performance around and into the election, we did see [AT1s] perform while rates were rallying in euros and selling off in US dollars, which made the potential resets in US dollars very attractive while the euro market recovered from some difficult executions." The four banks were issuing the product for the second time this year, and in the case of BPER only the second time ever. BPER's €500m no-grow perpetual non-call March 2030 AT1 was marketed on Wednesday at the 7% area before being priced at 6.50%. Demand held above €3bn. The pricing versus BPER's debut AT1 in January, a €500m 8.375% perpetual non-call June 2029 note, demonstrates how AT1 valuations have tightened this year. Coming from one of Italy's mid-sized banks, BPER's deal – which shared Wednesday's market with a Restricted Tier 1 from insurer Athora Netherlands – was not a typical market reopener, but benefited from strong support for Italian debt at home and abroad. "It's a country in vogue," said a third banker at one of BPER's leads. "Everyone loves Italian risk, there are good headlines around the banks and good domestic secondary market support, as we are seeing [on Thursday], with the bond trading at 101." Record book On Thursday, three national champions vied for attention. Deutsche was returning to the AT1 market after selling a €1.5bn 8.125% perpetual non-call April 2030 note in June. It marketed its new perpetual reset April 2032 AT1 with initial price thoughts of the 8% area and set the coupon at 7.375%, with the final book above €11bn. That is largest book on record for a euro AT1, according to IFR data. Santander set the previous record in January 2020 with a book above €10bn, while Deutsche's issuance in June came close with a final book of €10bn. Bankers said those results showed Deutsche had timed its visits to the market well, coming at points in the year when investors are especially keen to secure higher-yielding assets. The demand was also deemed a reflection of the fact that Deutsche trades wider than some of its peers in the AT1 market. Most recent European AT1s have priced with coupons with a six handle. Bankers away from the deal also said Deutsche's IPTs looked particularly attractive versus fair value, which most saw in the area of 7% to the low 7s. "It was attractive, an eye-catching number for accounts, but then they were able to tighten to 7.375% and still the book [continued to grow]," said a fourth banker. The new issue priced with a reset spread of 511.2bp. Doff your cap Jakub Lichwa, portfolio manager at TwentyFour Asset Management, said investors are still keen on

ECM bankers used every lever available to get an IPO over the line for Spanish water and energy utility Cox ABG Group in the forlorn hope that a book of non-traditional demand would not unravel on Friday’s trading debut. Cox completed its €175m all-primary IPO on Wednesday, a far cry from the €270m-plus-greenshoe deal that launched in early October with cornerstones in for about €80m. In the event, the cornerstones upped their participation to nearly €100m while the deal was trimmed to match demand as banks were never able to issue a covered message, despite extending bookbuilding by a day. When books finally opened after a delay in regulatory approval, the size was €200m, then revised to €175m in the last few hours of bookbuilding. The 15% primary greenshoe shrank to 10% and even then wasn't fully allocated at the final size of €10m, or 5.7% of the base deal. MENA-focused renewable energy business AMEA Power took €30m as planned and Cox founder Enrique Riquelme took €25m, up from €15m committed. Spanish copper and aluminium business Corporacion Cunext took €23m, up from €20m, while Spanish businessman Alberto Zardoya, through Ondainvest, took €19.5m, up significantly from €5m–€10m. Attijariwafa Bank had separately agreed to invest €5m and bankers said the Moroccan bank was allocated stock. In total, 17.1m shares were sold in the IPO at the bottom of the €10.23–€11.38 range for a €795m market capitalisation. The base deal shares represent 22% of the company with participation of existing shareholders meaning the free-float is 17%. At the start of pre-marketing, the valuation had been expected to be €1bn–€1.3bn. Pricing was set at estimated EV/Ebitda on consensus for 2025 of four times, a big discount to peers Acciona and Veolia trading at around 6.1 times. In yet another change, Santander replaced Bank of America as stabilisation manager. Atypical book required Cox's energy generation assets are held by subsidiary Cox Energy, which is listed on Spain's growth market and in Mexico, plus it has desalination plants in Morocco and Ghana. The equity story hinged on its pipeline of potential projects in Chile, Morocco, Mexico, South Africa and Spain. A senior banker involved said that potential pipeline was a tough sell to institutional investors – in any IPO market – and that is why there was a lot of company-related demand from day one. He said while interest largely came through the company, it was not really a club deal with more lines than might be expected. A second banker said that about two-thirds of the book went to cornerstones and friends and family money, with the other third comprising more traditional institutional investors. In total, there were around 50 lines. The net €165.5m raised in the base deal will be used to fund 41% of equity needs of projects with the remaining 59% to come from cash generated by the business or corporate debt, a change from the 47:53 split in the original prospectus. Project financing and corporate debt will provide the majority of funds for projects but they have yet to be arranged, the company said in its prospectus. Bankers did not expect there to be much trading in the stock on debut given the shape of the book, though they acknowledged that just one seller could mean a tough debut with little unsatisfied demand leaving the greenshoe to mop up. Trading began on Friday and shares fell as low as €8.70 before recovering to €9.40 on relatively light volume of around 1m shares after 3:30pm in London. A senior banker not involved in Cox said the size and demand profile meant it was "completely irrelevant" to the IPO market but illustrated the trouble with getting small and mid-cap deals away, which he called the market's "bread and butter" in normal times. A second banker away from the deal said that it wasn’t obvious whether pricin

Thames Water has gained enough support from its largest creditor group to move to the next stage of a plan to provide up to £3bn of emergency liquidity to the stricken firm and unlock cash reserves to save it from running out of money next month. Thames still needs to clear many more hurdles before its long-term future is secure, with the threat of entering the government's special administration regime continuing to hang over it. One credit investor said the deal backed last week was not a game changer for the company. “All it does is extend. [It] does not really change the picture. They need haircuts to bring equity to the table. It feels like a 'wait and see what happens'. The story is the same for us.” Thames is the UK's most highly geared water company, already running at 80% LTV against its regulated capital value of around £20bn, a long way off the 55% optimal level recommended by industry regulator Ofwat in its draft regulations for the next five years. The new funding facility would push Thames' gearing even higher. Thames said in a statement on Wednesday that creditors representing more than 75% of its Class A debt had given their approval by the early-bird deadline of 5pm on Monday. The creditors have also backed a proposal for Thames to access its cash reserves of around £400m and a convening hearing will take place on December 17. "This is an important milestone in implementing the liquidity extension transaction," the company said in a statement. “A process is ongoing to facilitate further creditor accessions to the [agreement].” The Class A bonds of Thames’ whole business securitisation vehicle make up more than £15bn of debt and an ad hoc group of creditors claims to have £12bn of those bonds. More than 120 financial institutions are part of the group and some have pledged to backstop the new facility. Those that voted by the early-bird deadline will receive a 0.75% fee. The approved proposal will see an initial tranche of £1.5bn provided upfront with an equal amount to come, broken into two £750m tranches, should Thames needs more time to negotiate with Ofwat over the next five years’ billing levels under its final determination process. The finance facility will charge 9.75% per year, with an original issue discount of 3%. It matures two and half years after issuance. The proposal comes alongside a two-year maturity extension on Thames' £17.4bn secured debt, which could give the company sufficient time to negotiate a wider restructuring of all its liabilities alongside an injection of fresh equity. Earlier this month, a separate group of junior Class B noteholders published a rival proposal, offering the whole £3bn upfront and at a lower rate of 8%. They had called on the UK utility to extend the early-bird deadline for the Class A proposal so both proposals could be considered. The exact level of support will not be disclosed until formal bondholder meetings are held on Monday. “Early voting suggests that the requisite consent levels will be achieved at the first bondholder meeting,” the Thames statement said. A source close to the Class A ad hoc group said more creditors had joined the consortium supporting the proposal since the initial tally had been announced. Dissenting class The proposals still need to be approved by the English High Court via a series of hearings at which the plans can be challenged by other creditors and stakeholders. A spokesperson for the Class Bs said: “This level of support is only the bare minimum required for the court to even consider granting its approval. The court will have to carefully consider matters such as fairness and alternatives when deciding whether to approve the non-consensual plan.” The Class B group said it would “continue to press for a better alternative for Thames Water”. One bondholder who had backed the Class A plan said: “Gi

German 10-year bond yields are trading above euro interest rate swaps for the first time in history, a watershed moment for these markets that underlines just how much investors have soured on government debt. It’s only two and a half years since Germany 10-year yields were hovering below zero, meaning investors were effectively paying for the privilege of owning the country’s bonds. Fast forward to today and yields have jumped across the globe in the wake of rampant inflation and governments running wider fiscal deficits. That loosening of the purse strings has even extended to Germany, a country renowned for its fiscal rectitude, raising the prospect of an increase in debt issuance to plug budgetary holes. Making matters worse, this expected increase in bond supply is coinciding with a buyers' strike from some crucial investors, including the most prominent player in these markets over the past decade: the European Central Bank. Those dynamics have contributed to 10-year swap spreads on Europe's main risk-free benchmark sinking into negative territory for the first time, exemplifying a new era of investor indifference towards these once highly sought-after securities. “There’s been a lower demand for long-dated government bonds as several investors have reduced exposure to the market, including foreign institutions, sovereign wealth funds and – most significantly – from central banks through quantitative tightening,” said Bruno Lettich, head of global rates, markets, at Standard Chartered, who also pointed to increased hedging activity that has pushed swap rates in the other direction. “This combination of flows has created a supply-demand imbalance between swap and government bond markets,” he said. Conventional wisdom holds that government bonds should trade at a premium to swaps to account for the higher credit risk involved in facing a bank as a swap counterparty. But market dynamics play an important role too – and have been known to upend this relationship. US Treasury and UK Gilt swap spreads first dipped below zero in the aftermath of the 2008 financial crisis and have since swung in and out of negative territory. Germany’s bonds had been immune to such pressures thanks to a chronic shortage of these securities in the market during the previous decade. Berlin maintaining a tight grip on spending constrained supply, while the ECB's vast bond-buying stimulus programmes have massively increased demand. Shifting dynamics Both those factors have been fading lately though, causing 10-year German swap spreads to plunge from a high of more than 110bp two years ago to minus 6bp on Friday. Germany's coalition government collapsed earlier this month following clashes over chancellor Olaf Scholz's proposals to increase spending to support the flagging economy and provide Ukraine with more aid in its war against Russia. At the same time, the ECB has been preoccupied with lowering inflation from multiyear highs, forcing it to raise interest rates and start to shrink its bond portfolio. “The Bund/euro swap spread has moved into negative territory because liquidity continues to decline, as the ECB becomes less active in bond markets, while the supply of government bonds looks set to increase significantly in the future,” said Pablo Zaragoza, head of European macro and sovereign strategy at BBVA. “Germany is unlikely to be as stringent on keeping deficits low as it was in the past. Therefore, the likelihood that more German paper comes to the market has increased,” he said. The Bund swap spread dipping into negative territory also came in the aftermath of Donald Trump’s victory in the US presidential elections as the prospect of higher government spending – and tighter central bank policy – became more firmly ingrained across global markets. That drove US and UK swap spreads further below zero, showing the renewed aversion from