Banks are at risk of losing out on significant underwriting fees from two of Europe’s largest buyout deals, as private-equity firms are adjusting debt terms mid-process, affecting their ability to generate revenue, according to a report by Bloomberg.
A key tactic being used by private-equity firms is the introduction of portability clauses in debt deals, which allow companies to keep their existing debt when sold, avoiding a common trigger that would otherwise force the buyer to refinance or pay off the debt upon a change in ownership.
This shift is beneficial for private equity firms looking to close deals in a challenging mergers and acquisitions (M&A) market, where securing financing has become more difficult. However, it negatively impacts banks, which miss out on fees they would normally earn by arranging new financing for buyouts.
Two of the largest deals in Europe’s leveraged finance market – the buyouts of Stada Arzneimittel AG and Techem GmbH – highlight this trend, with portability clauses potentially resulting in banks underwriting far less than the expected €9bn ($9.8bn) of financing for the two German companies, meaning significantly lower fees.
The report cites Julia Frank, Managing Director of Loans and Leveraged fFinance at Citigroup, as saying that though the use of portability has increased in debt agreements, it’s unusual for companies to introduce this feature mid-exit or during a sales auction.
Private-equity firms became accustomed to receiving portable loans when private credit firms dominated the market. Now that banks are once again a primary source of financing, buyout sponsors want to retain this benefit, which means they can avoid maturity problems is a sale fall sthriough, according to Frank.
In the Techem deal, the new owners—TPG and Singapore’s GIC—are requesting portability by asking lenders to waive a clause in Techem’s €1.85bn loan. This clause would otherwise require new debt to be issued after the acquisition closes.
Similarly, Bain Capital and Cinven have priced a €1.25bn refinancing for Stada that includes a portability clause. They are currently in discussions to sell Stada to buyout firm GTCR, though an initial public offering (IPO) is also being considered.
