Built for success
The €1.625bn loan for Germany-based building materials maker Xella was the first sizeable LBO out of the blocks in 2017 and set the tone for the leveraged loan market for the rest of the year.
The underwriting banks had to overcome a number of hurdles before the deal closed and became the largest single-tranche sponsor-led covenant-lite euro Term Loan B since the financial crisis and the largest European leveraged loan in the IFR Awards review period.
“It was an ambitious and aggressive transaction to underwrite that we had to take a view on,” said Martin Luehrs, co-head of EMEA leveraged capital markets at Morgan Stanley.
The large debt quantum came with high leverage on a covenant-lite basis. Investors were also cautious about the sector, given previous restructurings for other building companies.
The equity cheque was initially 30% and was finalised at 27.5%, lower than a typical 35%–40% commitment, and this all from a sponsor – Lone Star – that wasn’t especially well-known in Europe. The borrower couldn’t rely on rollover from existing investors, given previous owners PAI Partners and Goldman Sachs funds had a bank-heavy syndicate in place.
“It was not straightforward at five times for a cyclical credit and a less familiar sponsor. At the time, a number of people asked if we were nuts,” said Dominic Ashcroft, co-head of leveraged capital markets for EMEA at Goldman. “It pushed the boundaries and went a lot better than people thought. This was the deal that made us think the loan market will be constructive and we saw a step change.”
There was an added complexity as the underwriters had put something relatively aggressive on their books and held it over the Christmas period, delaying syndication until January.
“We needed to plan execution meticulously,” Luehrs said. “We felt as underwriters like there were a lot of pitfalls; you could easily get this one wrong and lose momentum.”
The financing was originally split between a €1.15bn Term Loan B and €250m of senior secured notes. Strong demand for the loans saw the note issue scrapped and the loan increased twice to be finalised at €1.45bn to return a portion of the equity to Lone Star. A €175m-equivalent revolver rounded off the deal. Pricing was cut twice, being finalised at 400bp over Euribor with a 0% floor at 99.75 OID.
“It set the tone for the rest of the year and showed the loan market was open and robust and willing to look at more difficult credits,” Luehrs said.
“Everyone wanted a deal to go wrong … to give the buyside momentum to push back, but this wasn’t it.”
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