Lenders urge GPs to talk about refinancing

A lofty $550bn worth of LBO loans is due to mature between 2012 and 2016, according to recent research published by Linklaters. The burden is also rising sharply, from $69bn this year to a $140n peak in 2014. The pressure is definitely on GPs - banks are in an arguably less liberal mood compared to when most of those deals were initially leveraged.

Regulatory and macro-economic trends suggest this state of affairs is unlikely to improve anytime soon. Meanwhile, the majority of European CLOs are likely to shy away from the LBO finance market when the wall of debt peaks, according to a report by Standard & Poor's.

"We have spent a lot of time visiting clients over the last 18 months, advising them that if they have a refinancing situation coming up - even in two or three years - and if they have a good story to tell, they should get ahead of everybody else and get a refinancing away," says Graham Olive, head of acquisition & strategic finance for Northern Europe at Natixis.

Some buyout houses clearly seem to acknowledge this. Last week for instance saw CVC launching a process to refinance the Formula One Group, which it acquired in 2006. It will look to replace $2.92bn worth of debt with a $2.27bn facility, thereby extending maturities from 2013/14 to 2017/18, in a process reportedly handled by Goldman Sachs and the Royal Bank of Scotland.

Meanwhile, US giant Blackstone concluded a £1bn refinancing process for leisure group Center Parcs at the beginning of March, six years after taking it private for £205m. Some were even more eager to beat the queue: listed French phone directory business Pages Jaunes, in which KKR and Goldman Sachs Capital Partners hold a joint 54% stake, refinanced €962m of its €1.79bn debt burden just a year ago - this allowed it to extend maturity on this tranche from 2013 to 2015. The heavily-indebted group is reportedly looking to refinance a further €638m in 2012.

This is a significant start, but arguably only the tip of the iceberg when looking at the overall amounts of LBO loans due to mature in the next couple of years. So why are we not seeing more refinancings being initiated?

Limited refinancing options in light of the current macro-economic environment are certainly a factor; but a reluctance to give up on the advantageous terms negotiated at the peak of the market could also play a role. "Some of the GPs that have not yet refinanced their portfolio companies had a cheap financing structure in place, possibly with ratchets or an asset element that enabled them to get a good deal the first time around," notes Olive. "But even if it will cost more, a refinancing provides stability and flexibility versus a cheap financing for two years that you then may not be able to refinance."

Granted, some of these GPs can still hope that they will be able to ‘amend and extend' the debt structures of their portfolio companies. "That can still work - the attraction is that it is lower risk for all the parties concerned," says Olive. "It is generally easier for banks to take financing positions in deals they're already involved in: they know the credit, and they know how it has performed. But it will not be available to everyone."

Necessary adjustments
Besides, there seems to be a growing consensus that GPs will have to pull their weight to a greater extent in the next wave of refinancings. Reinjecting equity in the business for instance might help GPs argue their case to increasingly selective lenders. In that regard, Blackstone's decision to provide a further £100m to Center Parcs as part of last week's refinancing may have been seen as a timely gesture of good faith.

"What is not going to be possible is trying to amend and extend when the structure is too far out of alignment to where the market is now," warns Olive. "Maybe that has to be corrected through a capital increase; or if it was an all-senior structure, mezzanine could deleverage the senior element to some extent."

If the banks' terms and conditions prove too tough, European GPs could still try their luck on the high-yield market. French engineering group SPIE - acquired by a consortium of private equity houses last year - is understood to have priced a €375m high-yield bond offering earlier this week to refinance the bridge structure put in place at the time of the €2.1bn buyout. But as unquote" recently reported, betting on sustained appetite in a notoriously volatile market might prove particularly risky.

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• Topics
• Financing
• Refinancing
• Natixis
• KKR
• Blackstone Group
• CVC Capital Partners