Termsheet: How GSO flashed the plastic

In May, GSO Capital Partners solely arranged the €625 million unitranche debt financing for the merger between Italian plastics company Polynt and its US counterpart Reichhold – a record for the European private debt market. The result is an international entity generating a combined annual income of $2.4 billion, subject to approval from the competition authorities.

In 2008, private equity group Investindustrial acquired a stake in Polynt, a company that focuses on the production of speciality polymers used in the construction, electronics and transport industries. Since then, the company more than doubled its annual revenue, hitting €1.3 billion in yearly income and acquiring CCP, a plastics manufacturer, from French firm Total to add to its units in Germany, Poland, China, the UK, US and Italy.

For Reichhold, the story has been a little more rocky. The firm’s US operations filed for Chapter 11 proceedings in 2014. However, following a repurchase of the assets by the company’s global hub and a debt-for-equity swap arranged by sponsor Black Diamond, it was able to emerge in a stronger position last year.

On the surface, €625 million is a huge exposure to a single deal, but it’s a sign of growing confidence in the European private debt market to underwrite such large tickets for highly complex mergers. Between €300 million and €400 million is coming from GSO’s senior debt fund with the remaining commitments from co-investors and limited partners, Reuters reported citing a source close to the deal.

GSO is in the unique position of being able to underwrite such a large transaction on its own. The previous record unitranche transaction saw four funds – Hayfin, ICG, HPS Investment and Bain Capital – club together on a €400 million financing of the merger between research companies Chiltern and Theorem in September 2015.

Holding so much exposure to a single transaction pushes many funds to syndicate parts of the loan. While there is no evidence of GSO seeking to sell parts of the loan (the firm declined to comment for this article), the increasing number of large tickets are powered by funds’ abilities to find a buyer.

As Alex Griffiths, partner at law firm Proskauer, says: “We are seeing more of these big-ticket deals, which makes sense when the larger players in the market underwrite either alone or jointly and then sell down chunks of the debt to reduce the presence of the deal on their balance sheet.”

One upside to the deal is the potential uptick in Italy’s image. Dubbed the “black sheep of Europe” by one well-regarded European debt fund manager, the country is beginning to open itself up to debt funds originating loans in the market. In February, Matteo Renzi, the prime minister, passed a decree (later passed by parliament in April) extending such rights to originate loans.

‘A FEW INCONSISTENCIES’

These changes, however, are not perfect. Mario Lisanti, a partner at law firm Norton Rose Fulbright based in Milan, says “the legislative changes are a good step forward, but there are a few inconsistencies on key legal and tax matters that could be easily addressed”.

“The strict limits on leverage could be a problem for certain credit funds, while the risk diversification cap (each transaction cannot be over 10 percent of the overall commitments of the fund) is a more general concern. That percentage figure is too low and appears inconsistent with the laws in force in other European countries,” he adds.
One Italian-based source close to the Polynt/Reichhold deal is also unsure of the potential boon to Italy as a market for private debt.

“Polynt is now part of an international group with a very relevant presence in the US, so I believe that the interest of debt funds for this type of asset will continue and will not change … after the transaction. However, it may encourage other Italian private equity funds to finance their large deals with a private debt structure instead of traditional bank debt.”

GSO had already been involved in high-profile transactions in the country in recent years, providing finance for distributor Fintyre and football club AS Roma.

As European firms increasingly raise larger funds, we can expect to see ticket sizes grow and further records smashed. If funds continue to flex their muscle and legal environments become more accommodating, borrowers which traditionally look to the high-yield market or banks for financing may be increasingly tempted by the big names in the European private debt market for such larger ticket sizes.