News & Analysis

LBO pricing rises in nervous market

But not all loans are more expensive, and prices in Europe are still lower than in the US.

-

The last five quarters have seen a slow increase in LBO pricing as lenders seek higher returns to offset a riskier market.

According to a report from credit-rating agency Fitch IBCA, banks participating in leveraged buyouts are charging more for their money on fears of a US and European economic slowdown.

The report says the weighted pro rata pricing for leveraged loans increased to 259 basis points (bps) above Libor in the first quarter of 2001. The average price for the same period last year was 225 bps.

“The market became nervous in the last quarter of 2000 and this has continued into the first quarter,” said Wendy Racine, one of the authors at Fitch. “A lot of these loans are heavily syndicated. In a jittery market, lenders like to see a higher price to enable them to syndicate it.”

The report cites loans to investment house Baxi Group and DIY retailer Focus Do-It-All as examples of this trend. Baxi paid Deutsche Bank, Royal Bank of Scotland and Société Générale Libor plus 225 bps to 325 bps for its LBO loan. And ING Barings and Bank of Scotland charged Focus Do-It-All Libor plus between 250 bps and 350 bps.

Racine said that she expected the rise in prices to continue through 2001. “The first two weeks of Q2 have been quite slow,” she said. “Our outlook for the whole year is that pricing will continue to go up.”

However, Racine noted that not all loans would experience a pricing increase. “We are still seeing loans in the 225 bps to 275 bps range, which is the average level for the past two years,” she said. The report cited Deutsche Bank’s loan to Lecta and the loan to EUBISCO structured by CSFB and Deutsche, which both lie within this range.

European prices are still not as high as prices in the US. “US prices are generally up around 300 – 350bps,” said Racine. “European prices are still significantly below that, but are starting to approach this level. This difference is down to different market dynamics.”

The Fitch report is based on data on loans it has rated, which it estimates at 70 per cent of loans of more than E200m.