Few would have predicted that a direct lender would extend (and hold) a €250 million loan in Europe two years ago. But the impression that non-bank lenders are restricted to truly mid-market deals was smashed in 2015.
Several large deals were signed in a year rounded off with Ares Management fully underwriting a €300 million financing package to back the acquisition of Fintrax, a tax-free travel shopping company, by listed French investment firm Eurazeo.
Nor was that the largest deal. GSO Capital Partners financed a £250 million ($357 million; €325 million) unitranche backing Bain Capital’s purchase of building materials firm Ibstock in December 2014. But that loan was intentionally short-lived, and was repaid after only eight months on GSO’s balance sheet.
Eurazeo bought a 90.7 percent equity and quasi-equity stake in Fintrax from private equity firm Exponent, paying €303 million upfront for the business at an enterprise value of €550 million. A further €35 million is payable based on 2016 performance. The financing demonstrates the ability of unitranche to compete with the €200 million-plus end of the market dominated by high-yield bonds and syndicated loans. You could say the sky is the limit. However, Mike Dennis, partner in the direct lending group of Ares Management, is a little more grounded.
“Sponsors are increasingly looking at unitranche as an alternative – especially given our ‘buy and hold’ strategy – which provides more certainty and deliverability. We can also offer a more timely financing solution since speed of delivery is often an issue. Importantly, given that we have no distribution requirement, it comes without market flex which is often a consideration of the sponsor,” says Dennis.
Edouard Guigou, deputy director at Eurazeo, says the deal is the first time its large-cap team used unitranche. This is down to the deal’s mechanics as much as the volatile financing environment of late 2015. Unitranche was the best option, he says, because of the flexibility on offer.
While declining to go into detail, this was achieved with the covenant calculation and the number of equity cures, Guigou explains. Fintrax, the parent company of Premier Tax Free, headquartered in Galway, Ireland, is one of two global leaders in its field, with luxury brands Dior, Missoni and Alexander McQueen among its clients. The company manages tax refunds and currency conversions for international shoppers in 31 countries.
While Fintrax is linked to the travel industry, tax free-shopping is not considered a cyclical business. However, it is subject to temporary shocks.
“You can have some exceptional event such as a volcano in Iceland that disturbs tourism for several weeks, so you need some flexibility in your financing documentation,” says Guigou. “You need to be able to take into account those short-term events and impact. And it appeared quite quickly that Ares and unitranche was giving us the most flexibility.”
The flexibility of alternative lenders comes at a cost. The €250 million acquisition line was split into a €220 million unitranche and a €30 million senior secured term loan, priced at 750bps and 260bps respectively, PDI understands. The blended price is around 700bps.
Ares also fully underwrote €50 million in undrawn facilities, including a €30 million revolving credit facility and €20 million acquisition facility. Ares has since syndicated some of that to Ulster Bank, Bank of Ireland and Allied Irish Bank.
Blair Jacobson, a partner and Dennis's co-head of Ares’ European Direct Lending Group, says: “We have always placed a high priority on maintaining constructive relationships with banks. In fact, more and more, we are sourcing investment opportunities for banks. Fintrax is a good example of this. Ares underwrote the deal and kept the risk-reward pieces that we wanted and offered the rest to a club of banks. All of this ultimately benefits companies and their owners.”
Eurazeo agreed the purchase 48 hours before announcing it. As an existing lender, Ares was able to act fast and was up-to-speed after four weeks of due diligence.
Guigou says: “They were very competitive if you compare to a bank syndicate. I think other direct lenders would have had difficulty to meet the quantum and the speed required in order to pre-empt the process.”
He adds that being fully financed gave Eurazeo a lot of comfort.
Another factor in Ares’ favour was its ability to offer high leverage, says Guigou. The €250 million term loan stands at a net leverage multiple of around 5.75x, PDI understands. The six- to seven-year loan has a non-call period of less than three years.
The facility is covenant-loose with one maintenance covenant on leverage. A market source tells PDI there are four equity cures. Equity cures in the mid-market are controversial.
The mechanics depend on the deal but they typically allow sponsors to create the impression of stronger performance by injecting cash to boost EBITDA and avoid breaching covenants.
Given the size of the business and the inherent temporary shocks that the business is exposed to, some argue that for Fintrax that aspect of the structure is less of a concern.
Commenting on the market generally, David Parker, partner at Marlborough Partners, which advised Eurazeo on the financing, says: “If you have a €300 million deal – your alternatives include high yield or potentially, if it’s a really great credit, the cov-lite loan market – with no maintenance covenants.”
All parties declined to comment on the covenant package.
Fintrax has achieved strong growth in the last three years, chief executive officer of Fintrax, Patrick Waldron, tells PDI.
“The outlook to 2030 is that the number of people getting wealthier will rise steadily, but increasingly in new geographies and continents. As they get wealthier they want to travel more and as they travel more, they like to buy luxury goods as part of that experience,” argues Waldron.
What changes is where those travellers come from. Brands in China experienced pressure recently, but Waldron says the company is insulated against this with a diversified market position that includes half the world’s luxury brands, he says.
But it does mean the company seeks supportive financing structures. “For growing companies you are always looking for more flexibility and the degree to which your lender can allow for that is important, particularly if it’s an attractive sector,” Waldron says.
Global Blue, the world’s largest tax-free travel shopping company, issued €572 million of debt on the syndicated loan market around the same time as Fintrax. The company had to rejig its leverage before it would fly with investors, cutting it from 4.5x to 3.7x, PDI understands.
The higher leverage on Fintrax is justified, argue the interested parties, given the company’s growth rate. Waldron says Global Blue was once six times bigger than Fintrax. Now it is 2.5 times.
Ares highlights how the Fintrax LBO financing will maximise leverage, whereas the Global Blue debt includes a €300 million dividend recap for sponsors Silver Lake and Partners Group.
Bigger bilateral unitranche loans are on the horizon, many agree. Any deal up to €500 million could potentially have a unitranche alternative, Parker says, and although unlikely, he notes that three or four direct lenders could club together for a €1 billion transaction. The €400 million club deal for Chiltern International backed by ICG, Hayfin, Highbridge and Sankaty and signed in September 2015, demonstrates that potential.
That said, unitranche still can’t compete with the cov-lite bank loan market, Parker adds.
The European mid-market has entered a phase where privately-tailored bespoke debt deals are having their day. And the aperture of what private debt is able to execute is growing, Jacobson and Dennis say.
That debt markets were choppy in 2015, with more volatility in store this year surely helps. For Ares and their fellow private lenders in 2016, the hunt for bigger game is on.
€300m financing package split into:
• €220m unitranche with 750bps margin
• €30m senior loan with 260bps margin
• €30m undrawn revolver syndicated to banks
• €20m undrawn acquisition facility syndicated to banks
Covenants: single maintenance leverage covenant
Equity cures: four allowable
Net leverage: roughly 5.75x
Tenor: six-seven years