Late last Friday, billionaire Patrick Drahi put the bankers he assembled to finance a $23 billion bid for Vivendi SA’s French phone unit on the spot. He wanted to increase the cash portion of his offer by more than $2 billion, with a record amount of loans giving lenders little protection if the fortunes of the combined company diminish.
The nine banks said yes.
The deal signals confidence in the euro zone, which was in danger of breaking up just two years ago as Greece, Ireland, Portugal and Spain sought bailouts amid a sovereign debt crisis. The interest rate premium demanded for European leveraged loans compared with the U.S. has almost been wiped out and it’s the cheapest to issue junk bonds relative to the American market in at least a decade.
“It tells you how strong the markets are,” Bernard Mourad, a Paris-based managing director at Morgan Stanley, which advised Drahi on the acquisition, said in a telephone interview this week. “There’s a lot of money waiting to invest in European deals with decent risk and return profiles.”
Borrowing conditions are the best in Europe since at least the start of the financial crisis, with the average interest margin on leveraged loans falling to within 3.67 percentage points of benchmarks, according to data compiled by Bloomberg. That’s 1.5 percentage points less than the average in the first three months of 2013, and compared with 3.61 percentage points on dollar deals.
Appetite for debt is so high that banks in Europe are starting to provide what’s known as covenant-light loans. This typically gives companies more financial leeway because they don’t have to comply with restrictions such as debt-to-earnings ratios and ensuring sufficient cash flow to cover interest payments.
There were 8 billion euros ($11 billion) of covenant-light loans issued in Europe last year, up from 1.4 billion euros in 2012, according to S&P Capital IQ LCD. The debt financing of SFR is the largest covenant-light deal in Europe on record.
Drahi, 50, the Morocco-born founder and chairman of Luxembourg-based Altice SA, needed debt with the fewest covenants to trump a competing offer for SFR from Bouygues SA, which had the backing of the French government. He’s raising the cash through Altice and Numericable Group SA, in which he holds a controlling interest and which is going to be combined with SFR when the deal is completed.
Company officials met with investors in London yesterday as the nine underwriting banks, led by Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co., seek to market the debt.
As part of the financing, 5.6 billion euros of six-year loans are being offered with an interest margin of 3.5 percentage points to 3.75 percentage points more than benchmark rates, according to a person familiar with the matter, who asked not to be identified because the terms are private. Meetings with investors are scheduled in New York today.
The debt is rated three levels below investment grade at Ba3 by Moody’s Investors Service, according to a statement. The loans don’t have any financial covenants, according to documents sent to investors outlining the terms of the deal. Leveraged loans and junk bonds are graded below Baa3 at Moody’s and BBB-at Standard & Poor’s.
An external spokesman for Altice and Numericable declined to comment on the financing.
“A deal like Numericable’s couldn’t have happened last year, arrangers are getting bolder,” Philip Yeates, head of debt fund management at Rothschild in London, said in an interview yesterday. “It’s good for the market as it will test its depth.”
In the corporate bond market, yields show it’s 1.76 percentage points cheaper to raise junk-rated notes in euros compared with the U.S., the biggest discount since at least 2004, according to Bank of America Merrill Lynch bond indexes. Average yields for euro-denominated high-yield securities dropped to a record 4.3 percent, down from an all-time high of 27.8 percent in 2009.
The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to euro-era lows of 2.24 percent yesterday, Bank of America Merrill Lynch indexes, as Greece ended a four-year exile from international markets with a bond sale of 3 billion euros.
Numericable’s 225 million euros of 8.75 percent notes rose 2.5 cents this week to 117 cents on the euro, the biggest weekly increase since the notes were sold in October 2012, according to bond prices compiled by Bloomberg. The notes yield 4.8 percent, compared with 8.6 percent in October 2012.
“The U.S. had got well ahead of Europe, with spreads tightening very fast,” Charles Bennett, a managing director for European credit sales and fixed income at Credit Suisse Group AG in London, said in an interview April 8. “Investors are beginning to take notice, with U.S. lenders wanting to look at European assets.”
And there’s a chance the cost of money could get cheaper, with almost two-thirds of respondents in a monthly survey by Bloomberg predicting European Central Bank President Mario Draghi will ease policy by June. Of those economists, just under 50 percent said he may implement multiple measures ranging from interest-rate cuts to asset purchases and long-term loans.
That allowed Italian mobile-service group Wind Telecomunicazioni SpA to refinance $1.8 billion of 12.25 percent notes this week with new securities yielding less than 7.5 percent.
And companies that once raised funds in the U.S. markets because it was cheaper are returning to Europe. Before the financial crisis, some of the Belgian cable service provider Telenet Group Holding NV’s debt was in dollars, while now it’s all in euros.
Yields on the junk-rated company’s 450 million euros of 6.25 percent notes dropped 1.1 percentage points to 4.9 percent in the past 12 months, bond prices compiled by Bloomberg show.
“Mr Draghi’s monetary policy has been quite helpful indeed,” Thomas Deschepper, a spokesman for Telenet said in an April 9 interview. “He has created a very benign environment to borrow in euros.”