Late-to-Party Borrowers Facing Pushback From Creditors

Lenders in Europe are starting to push back against borrowers’ attempts to reduce interest payments as sales of high-yield, high-risk debt surge.

Endemol NV, the Dutch producer of shows including “Big Brother” and “Deal or No Deal”, is being asked to pay more interest on about 1 billion euros ($1.3 billion) of so-called covenant-lite loans that offer investors less protection. Continental Foods Belgium NV, the maker of Campbell Soup, and German plastics maker Styrolution Group GmbH are also having to pay up to raise funds.

The resistance follows warnings from global policy makers that complacency induced by six years of unprecedented stimulus from central banks is increasing chances for future market instability. About 12 billion euros of leveraged loans have been marketed in Europe this month following 26 billion euros in June, according to data compiled by Bloomberg.

“People are pushing back on aggressive deals, not just on covenant-lite deals,” Ranbir Singh Lakhpuri, a London-based money manager at Insight Investment Management Ltd., which oversees the equivalent of $506 billion. “Many deals are coming late to the party and meeting satiated guests on the way out.”

M&A Deals

Loan issuance has been fueled by a surge in deals financing mergers and acquisitions by private equity and venture capital firms in the region which climbed to $110 billion this year, a 75.4 percent increased from the same period in 2013, data show.

The record $113 billion of high-risk, high yield bonds sold in Europe this year is also starting to generate indigestion, with the securities poised to hand losses to investors in July for the first time since August 2013.

Winoa SA, the French producer of abrasives for metalworking, scrapped a bond offering July 22. Investors demanded higher yields to buy the company’s 260 million euros of junk notes as well as more assurances over the time during which securities couldn’t be repaid.

The average yield investors demand to hold junk-rated bonds in euros is 3.74 percent, up from a record 3.46 percent in May, according to Bank of America Merrill Lynch index data. Sub-investment grade bondholders are poised to lose 0.1 percent this month, reducing gains for the year to 5.3 percent, the data show.

‘Deal Fatigue’

“There’s just not enough juice in these deals and there’s a bit of deal fatigue,” said Edinburgh-based Steven Logan, head of European high yield at Scottish Widows Investment Partnership Ltd., which manages about $242 billion.

Endemol is seeking to raise 700 million euros of term loans, as well as 335 million euros of more junior second-lien loans, Bloomberg data show. It’s had to increase interest margins on both portions by 0.5 percentage points and is now offering 8.75 percentage points more than benchmark rates on the riskiest debt, the data show.

The company is raising the money to fund a recapitalization following its takeover last month by New York-based Apollo Global Management LLC. The hedge fund took control of Endemol after buying out the company’s debt at a discount.

Endemol’s London-based spokesman, Charlie Gardner, declined to comment on the changes to the loan terms.

Interest Margin

Continental Foods increased the interest margin on 270 million euros of seven-year loans to 4.25 percentage points more than benchmark rates from 4 percentage points and reduced the size of the loan from 285 million euros, Bloomberg data show. Officials at Continental couldn’t be reached for comment.

Styrolution lifted the margin on some of its 1.6 billion euros of covenant-lite loans to 4 percentage points from 3.5 percentage points. Jeremy Whittaker, a spokesman for the company, declined to comment on the loan.

“There are so many deals in the market that we’re starting to see an increase in fees or margins, but covenant-light deals still get done,” said David Parker, a partner at advisory firm Marlborough Partners in London.

French medical diagnostics company Sebia SA’s 425 million euros of covenant-lite loans attracted enough demand to allow arrangers Nomura Holdings Inc. and Goldman Sachs Group Inc. to lower the interest to 3.25 percentage points above benchmark rates from 3.5 percentage points, Bloomberg data show.

CLO Demand

Europe’s loan market has been boosted by demand from collateralized loan obligations, with almost 7 billion euros of the notes priced by the end June, according to Bloomberg data. Issuance of the CLOs, which pool high-yield securities and slices them into notes of varying risk and return, is up from 2.4 billion euros in the period last year.

Investors also have money to play with because in the three months to June, 16.6 billion euros of loans were repaid, representing a 15.6 percent quarterly repayment rate, according to data from S&P Capital IQ LCD.

“There’s already been some pushback on loans, leading to repricing as not all of the deals are doing well, and there may even be more,” Peter Higgins, a London-based partner at Bluebay Asset Management Ltd. said in an interview. “Supply, pricing and overall quality of businesses, rather than the cov-lite structures have caused some pushback. As creditors, we do generally prefer them.”

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