Monday23 March 2020 ★ FINANCIAL TIMES 7
CO M PA N I E S & M A R K E T S
R O B E RT S M I T H A N D K AY E W I G G I N S
LONDON
A handful of investment banks agreed
last month to underwrite a high-risk
debt deal backing the acquisition of an
Italian brand selling luxury sneakers
for as much as £1,000, often to
wealthy Asian customers.
Now, as Golden Goose reels from the
effects of the coronavirus outbreak, its
€1.3bnprivate equity buyout by
Permira has become a symbol of heady
times for dealmakers when prices rose
and rose —with one investor familiar
with the deal dubbing it a “golden
turkey”.
It is a “running joke”, said a banker
who declined to be involved in the
financing. “It’s Italy, it’s Asia, it’s high-
end fashion [... ] it ticks all the boxes.
It’d only be worse if they owned an
airline as well.”
While the debt backing Permira’s buy-
out is a relatively smallproblem for the
banks concerned—Credit Suisse and
Goldman Sachs backstopped the largest
share of a €450m bridge loan—it is
emblematic of how quickly the tide is
turning on a decade-long leveraged buy-
out boom.
Faced with growing demand from
institutional investors seeking to buy
debt from companies without an invest-
ment-grade credit rating, banks in the
business of selling these loans and
bonds had offeredlooser and looser
credit terms or their private equity cli-f
ents.
Mathieu Chabran, co-founder of asset
manager Tikehau Capital, said that,
over the past decade in debt markets,
“the music has been playing so loudly,
that effectively it was always bigger,
always more leverage”.
“Some people say: ‘is this the end of
the world?’” he said. “It’s certainly the
end of one specific world: a certain
excess in terms of valuations and [lever-
age].”
With a pandemic roiling markets and
knocking demand for riskier debt, the
banks now face a reckoning: they hold
more than €13bn of so-called bridge
loans backing European buyouts, where
they have not yet been able to offload
the risk to institutional investors.
In a typical LBO, banks agree to back-
stop the debt initially and then look to
profit by selling it on to investors as
either bonds or loans.
If the markets collapse, however,
these lenders can end up stuck with this
bridge financing—known as a “hung”
deal—or they have to shift the debt at
deep discounts, taking a hit to their
balance sheets in the process.
The bulk of the outstanding European
bridge loans are ranked “single B”—
above the worst tiers of junk-rated debt
but still considered highly exposed to
economic shocks.
The biggest European exposure fac-
ing the banks stems from one mega-deal
they signed up to only last month:
Advent International and Cinven’s
€17bn carve-out ofThyssenkrupp’s ele-
vator business, one of Europe’s biggest-
ever private equity buyouts.
Lenders including Deutsche Bank,
UBS and Barclays have already shifted
the highest-risk slice of the deal. A group
of funds, including Goldman Sachs’s in-
house principal finance unit, are buying
into a €2bn “payment-in-kind” loan,
which is higher risk because the Ger-
man lift maker can pay its interest with
further debt.
But that still leaves the banks with
around €8bn of debt exposure, of which
Goldman’s investment banking division
has the largest share at over €1.5bn,
according to three people familiar with
the matter. Goldman Sachs declined to
comment.
Bankers on the deal said they are
comfortable holding this risk for the
time being. Despite the deal’s size, they
think that the business’s reliable streamof revenue from longstanding servicing
contracts cushions it from the global
economic disruption.
Others are blunter in their assess-
ment.
“It is a great business, there is no
doubt about that; but [the loan] is under
water,” said a senior banker who is not
involved in the financing. He thinks the
banks will take a hit on the deal. “At
least you’ll have something decent to
sell but you are still losing money.”
The problem facing investment banks
is nowhere near the scaleseen when the
last LBO bubble burst in 2008. Backthen, thinly capitalised lenders had
made even bigger loans to even more
speculative businesses. The risk this
time is comparatively small.
“Our leveraged finance exposure at
this point is about 85 per cent lower in
terms of ‘single B’ than it was at the time
of the global financial crisis,” Credit
Suisse’s chief financial officer David
Mathers told investors on Thursday.
Yet while the scale may be lower,
some of the terms of these bridge loans
are even looser than at the peak of the
last cycle.
Covenant-lite loans, which lack tradi-
tional protections allowing lenders to
step in if a business deteriorates, were a
rarity in Europe during the peak of the
last buyout boom in 2007.
This once taboo structure hasnow
become standard n almost every deal.o
And while leverage—a company’s
debt relative to its annual core earn-
ings— ppears lower, lenders havea
allowed private equity firms more free-
dom tomassage those numbers ot
include “adjustments” reflecting cost-
savings they expect to achieve.
This means the true leverage on these
deals is often higher than it appears,
even before the effects of the spreading
coronavirus take their toll.
“People aren’t stupid, they won’t look
at ‘Covid-adjusted earnings’”, said a lev-
eraged finance banker. “They’ll look at
where similar loans are trading and will
price it there.”
Golden Goose, whose high-end train-ers are popular with celebrities such as
Taylor Swift, Jude Law and Sheryl Crow,
looks to be in the line of fire. Even with
adjustments, the business’s ebitda was
pegged at less than €95m—putting lev-
erage at roughly 4.75 times.
But bankers involved in the deal said
they have cause for optimism.
Although Golden Goose is headquar-
tered in Venice — and Italy is one of the
countries worst hit by the coronavirus —
they hope that online sales could sustain
the business, especially if the virus has
passed its peak in Asia.
Credit Suisse and Permira declined to
comment.
For Credit Suisse, the deal is not its
only Italian exposure. It has also under-
written a small bridge loan backing BC
Partners’ buyout of Bindi, a frozen patis-
serie company. And the Swiss lender has
been unsuccessful in its efforts leading a
€1.6bn loan sale backing family-owned
equipment rental business Boels.
Other banks’ deals also look increas-
ingly difficult, according to market par-
ticipants.
Deutsche, Goldman, Barclays and
other lenders still have to shift nearly
€ 7 0 0 m o f d e b t b a c k i n g L o n e
Star’s €3.17bn acquisition of BASF’s
highly cyclical construction chemicals
business. And a group of banks led by
Barclays are gearing up to sell £1.4bn of
loans financing TDR Capital-owned
Stonegate Pub Company’s buyout of
rival UK bar operator Ei Group.
On Friday, the UK government
ordered pubs, restaurants and leisure
centres in Londonto close, which bank-
ers said creates uncertainty for the deal.
In normal times, the tough conditions
facing the bridge-financing market
would have bankers seriously worried.
Yet, with the pace of coronavirus-re-
lated deaths growing by the day, schools
closing and the threat of empty super-
market shelves, many leveraged finance
executives are philosophical.
“I think this crisis is so severe, no one
actually gives a damn about bridge
risk,” said a banker who is working on
several of the pending deals. “Sure,
these situations are tough but we’re
much better capitalised than in 2008
and it’s low down on the list of problems
facing the world.”Banks face reckoning as dealmaking run ends
Goldman Sachs,
Credit Suisse and
rivals left holding
more than €13bn
of debt backing
European buyouts
Sources: S&P Global’s LCD; DealogicThe growth of covenant-lite
leveraged loans in Europe
Share of institutional debt (%)0204060801002007 10 12 14 16 18 20Leverage is creeping up on
European buyouts
Debt-to-earnings ratio on private
equity acquisitions024682007 10 12 14 16 18 20Top 10 European leveraged buyouts
2005200520052005 07070707 0808 09 10 11 12 13 14 15 16 17 1818 19191919 202020Wind (Weather Inv) 10.TDC (PE-led consortium) 12.VNU (PE-led consortium) 9. 2
BAA (Ferrovial) 19.AWG (PE-led consortium) 7.
Thames Water (Macquarie) 11.Alliance Boots (KKR) 15.5 Akzo Nobel
(Carlyle) 10.Nestlé Skin Health
(EQT Partners) 9.Thyssenkrupp’s
elevator division (Advent- and
Cinven-led consortium) 1 7. 2By enterprise value (€bn)Acquirer’s name in parentheses
Data cover deals where target companies’ core operations are based in EuropeG E O R G E H A M M O N D
Private equity firm Blackstone has
agreed a £120m deal to buy 22 logistics
sites across the UK as online shopping
soars in response to the coronavirus
pandemic.
Blackstone’s purchase of the portfolio
from Clearbell Capital, a private real
estate fund manager, follows last week’s
£4.2bn swoop by rival firm KKR forUK
recycling company Viridor.
As mergers and acquisitions dry up
globally in the face of the pandemic, pri-
vate equity investors have continued to
be relatively active, betting on sectors
such as infrastructure and logistics.
“There will be deals that will fall away
but, if the fundamentals are strong on
the underlying assets, the deals will
occur,” said Manish Chande, senior
partner at Clearbell. “We’re not all head-
less chickens.”
Blackstone’s latest UK acquisition is
further evidence of its conviction that
ecommerce and delivery services will be
an ever larger part of the retail market.
Under its Mileway division, Black-
stone has accrued a portfolio of around
1,300 logistics properties across Europe,
which were valued atabout €8bn in Sep-
tember. The portfolio consists of “last
mile” properties — warehouses that are
close to city centres and so help cut
delivery times.
In September, James Seppala, head of
Blackstone real estate in Europe,
described last-mile logistics sites as one
of Blackstone’s “highest conviction,
long-term investment themes”.
Blackstone has also been active in
the sector outside Europe, agreeing a$5.9bn deal to buy Colony Capital’s
industrial warehouse portfolio n the USi
last year.
Last June it alsoagreed the largest
ever private real estate deal, buying
Singaporean logistics facilities’ provider
GLP’s US warehouse portfolio for
$18.7bn.
The spread of coronavirus — there
were316,746 confirmed cases y yester-b
day, according to data compiled by
Johns Hopkins University — has forced
many retailers to close, with many peo-
ple moving to online shopping instead.
Alibaba, the Chinese online retail
giant, has had a rush of demand for
products such as face masks and
hand sanitiser as coronavirus spread
through China.
Amazon has seen similar rises in
demand from shoppers in the US and
Europe who are staying at home during
the outbreak. Amazon announced last
week it was hiring 100,000 people to
assist with deliveries.Financials
Blackstone ups bet on online shopping
‘It’s certainly the end of
one specific world: a
certain excess in terms ofvaluations and [leverage]’
Sheryl Crow wears Golden
Goose trainers at Glastonbury.
The brand’s €1.3bn buyout has
become a symbol of heady
times Guy Bell/Shutterstock—‘If the fundamentals are
strong on the underlying
assets, the deals occur’Manish Chande, Clearbell CapitalMARCH 23 2020 Section:Companies Time: 3/202022/ - 18:11 User:jon.wright Page Name:CONEWS2, Part,Page,Edition:ASI , 7, 1