LONDON, May 8 (IFR) - (The following story appeared in the May 5 issue of International Financing Review, a Thomson Reuters publication). The trend of European borrowers accessing US liquidity has stepped up a gear, with Misys becoming the latest company to tap the US leveraged loan market as cash continues to drain out of Europe. London-based Misys, which provides software to the banking industry, is readying a $1.06 billion term loan to back its 1.3 billion pounds ($2.10 billion) leveraged buyout by Vista Equity Partners. Similarly, German bathroom equipment maker Grohe launched last week a $250 million covenant-lite tranche in the US as part of a refinancing package, adding to the growing number of European borrowers attracted to US cash, even though some have no dollar revenues, nor a presence in the region. Year-to-date, a total of nine sponsor-backed European borrowers have accessed both European and US liquidity for buyout loans and refinancings. On these deals, $11.5 billion or 52 percent of the total liquidity came from dollars compared with 8 billion from euros. The lower pricing and cov-lite terms offered by US accounts are attractive to European borrowers and underwriting banks, faced with a lack of liquidity at home and fearful of a risky outlook that could make a syndication process difficult.
"You cannot afford to structure covenant-lite in Europe as you need to be able to maximise liquidity to the fullest," a leveraged loan banker said. Grohe has followed Swiss chemicals firm Ineos in opting for a cov-lite loan, a structure that has become possible again thanks to the increased demand for loan assets in the US market and a corresponding decline in spreads."While the European market is so unstable, the trend of European borrowers accessing US liquidity will continue. It is a perfect mixture of not having enough liquidity and volatility attached to the region that is pushing companies away," a leveraged loan syndicate head said.
"If you underwrite a deal tomorrow, who knows what the European market will be like in four weeks' time when you go to syndicate? For the big underwrites with high leverage, banks will go to the US, as there are more guarantees the market will be there," he added."If there is a euro carve-out in the deal, it will keep the European market just alive - if there is no carve-out, then it is even more problematic for Europe."GROWING TREND Misys and Grohe are following in the footsteps of Formula 1, Ineos, Germany's KDG, France's Oberthur, Germany's Schaeffler and Belgian group Taminco, all of which had successful syndications in the US.
German healthcare conglomerate Fresenius is set to be the next borrower to turn to the US, in its case to back its 3.1 billion euros ($4.05 billion) buyout of Rhoen-Klinikum, while Iglo, maker of Birds Eye fish fingers, is also expected to tap the US to back a 3 billion euros acquisition, as a deal of that size would pose a tough challenge for the European market."Any deal requiring more than 1.4 billion euros to 1.5 billion of leveraged loans will struggle to raise them in Europe. It would be very difficult," a banker said. The situation has prompted purely European companies such as Iglo to consider setting up US companies to get around withholding tax, as getting dollar funding turns from a "nice to have" into a "need to have" scenario. The lack of liquidity in Europe is accentuated by CLOs in the region coming to the end of their reinvestment periods, and banks have less appetite for risk due to increasing regulations. But bankers warn that European investors risk becoming irrelevant."European investors have to decide whether they want to stick around and have a life. How will they raise funds if they don't invest in anything?" a second banker said. Questions remain as to how long this transatlantic trade can continue, since looming regulation including the Foreign Account Tax Compliance Act could turn off the tap to US liquidity, potentially plunging the European market into greater turmoil. ($1 = 0.6180 British pounds) ($1 = 0.7663 euros)