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Upfront
n OPINION INTERNATIONAL FINANCING REVIEW
Too big to fail
T
he transatlantic leveraged finance market is facing a
unique challenge as two massive buyout loans compete
for investors’ time and money.
The market is being asked to absorb the US$13.5bn-
equivalent debt financing backing Blackstone’s buyout of a 55%
stake in Thomson Reuters’ Financial & Risk division and the
US$7.6bn-equivalent loan and bond deal backing Carlyle’s
acquisition of Akzo Nobel’s speciality chemicals business. That
won’t be easy, especially considering the Single B ratings.
While the two huge deals highlight the market’s
development – not least as each is backed by a single private
equity firm – their convergence is also a sign that the banks
that underwrote the deals earlier this year could wait no
longer to launch them after a turbulent summer.
It is an understatement to say that it is very important that
both deals go well. If either deal struggles, it could effectively
close the markets until the end of the year – if not longer –
and would move pricing significantly higher again as banks
struggle to unload an overhang of paper.
Investors are just starting to dig into the deals and run
their own numbers. They are expected to take a nerve-
wracking three weeks to come up with final responses and
are certain to treat what they are told by underwriters and
sponsors with a considerable degree of scepticism.
Carve-outs are some of the most lucrative deals ever done by
private equity firms. As “must do” deals, it is not in the market’s
interest for the transactions to fail, for the lead banks to be
pushed into losses or for the market to grind to a halt, but
investors will still have to like the deals and swallow the terms.
The bad news is that both deals need to convince investors
who are increasingly suspicious of aggressive Ebitda
adjustments and covenants. The good news is that the
monster deals are coming in a better market than that in
June and have the stage all to themselves.Homeward bound
L
ondon-Shanghai Stock Connect is tailor-made for HSBC.
China’s latest global equity trading link aims to encourage
UK and Chinese companies to list depositary receipts in each
other’s markets. Assuming it opens later this year, as scheduled,
the first overseas company to list in China could be an old
British bank, not a Chinese new-economy champion.
Smartphone maker Xiaomi walked away from plans to sell
the first Chinese depositary receipts in July, and there is no
sign that any other overseas-incorporated Chinese technology
giant is preparing to launch a CDR issue any time soon.
Enter London-Shanghai Connect. The draft rules are still
light on detail, but previous schemes suggest regulators will
allow cross-border trading in the biggest stocks in their
respective markets, at least in the initial phase.
It doesn’t take much imagination to name the most likely
eastbound candidate: the second-biggest company in the
FTSE 100 index has been keen on a Shanghai listing since at
least 2001.HSBC, which opened in Hong Kong and Shanghai in 1865,
was a vocal supporter of Shanghai’s efforts to introduce an
international board almost 10 years ago, even hiring Chinese
underwriters at one point in 2009. The project stalled, however,
and China’s regulators eventually shifted their focus elsewhere.
The London Connect blueprint could allow the Hong Kong
and Shanghai Banking Corp to revive those ambitions, but it
comes with some drawbacks. Notably, London-listed
companies would only be allowed to sell CDRs backed by
existing shares, so any move would be purely a branding
opportunity, rather than a capital raising exercise.
It’s also not yet clear whether the CDRs would need to be
denominated in renminbi, or how a CDR under London-Shanghai
Connect would be compatible with China’s earlier rules limiting
CDR sales to cherry-picked, “innovative” companies.
The framework also envisages Chinese companies floating
GDRs in London to tap into a global investor base, but that
westbound logic is harder to justify. The London Stock
Exchange is already an open market, but only four Chinese
issuers trade there. The last to list was Air China in 2004.
Details will be important, of course. Given the strategic
value that HSBC places on China, however, any trading link
between London and Shanghai already looks like a winner.Read the small print
W
hen investors agree to looser covenants in bond deal
documentation in return for a few extra basis points,
what exactly do they expect to happen?
Time and again, they appear flabbergasted when something
they have accepted in principle – and which must therefore at
least rank as a possibility – actually comes to pass.
So imagine the umbrage taken when German retailer CBR
Fashion announced it was paying a €50m dividend to its new
sponsor while not paying back holders of its €450m 2022 bonds.
But CBR was perfectly within its rights. When the company
was sold in March, no 101 change-of-control put option was
triggered, as the bond’s terms allowed the company to exercise
portability without deleveraging. And it is not as if investors
were not alerted to the fact by independent observers.
Similarly, earlier this year, Shop Direct disclosed it had made
£123m of intercompany loans that can be used to make dividend
payments to its owners, while Picard took €78m out of the market
for shareholders, having done the same thing just months before.
And simple things such as a call date not being the same as
a maturity date should not really come as a surprise –
although, seemingly, it quite often does. There was a reason
investors were being paid x and not y, after all.
Ratings cuts and price falls often accompany such moves
and investors are invariably the ones left wringing their hands.
There does now appear to be a growing buyside willingness
to push back on some of the more onerous terms, although
the temptation to try to maximise returns will never be far
from the surface. But if investors don’t want to end up in
such tricky positions, they shouldn’t agree to tweaks on the
understanding that “they’ll never be used – honest; don’t
worry”. Because, the thing is, they will.International Financing Review September 8 20182 Upfront 2250 p1-2.indd 1 07/09/2018 19:59: