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CommentFebruary 3 2014

Leveraged finance goes local for SG CIB in the Czech Republic

Société Générale CIB arranged a record large loan for PPF Group to buy out Telefonica's Czech subsidiary, and found plentiful liquidity in local currency.
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Leveraged finance goes local for SG CIB in the Czech Republic

While the European leveraged loan market has been at its busiest for five years, it has not been firing on every single cylinder. Renewed demand for acquisition finance has not, so far, lived up to bankers’ expectations. And the market in central and eastern Europe (CEE), where they had high hopes, has largely disappointed. So the signing of €2.29bn equivalent in senior loans to support PPF Group’s purchase of a majority stake in Telefonica Czech Republic was welcome on all counts. It also shone a light onto the role of local liquidity.

The transaction’s global coordinator and initial underwriter was Société Générale Corporate and Investment Banking (SG CIB). Société Générale has built a substantial footprint in CEE, where it has majority stakes in Czech Republic’s Komercni Banka and Romania’s BRD. Further east, it controls Russia’s largest foreign-owned bank, Rosbank.

“We are supporting the clients of those networks,” says Damien Lamoril, SG CIB’s head of European loan syndicate. “CEE and Russia are very important regions for Société Générale.”

PPF Group, a privately held investment group with assets of €22bn, is one of the largest investors in CEE. Based in Amsterdam, it was founded in 1991 by Czech businessman Petr Kellner, currently said to be the wealthiest person in the Czech Republic. PPF’s interests are international and diverse, and include financial services, property, energy, mining and retail.

Twin attraction

In November 2013, PPF announced that it had agreed to buy a controlling stake in telecoms operator Telefonica Czech Republic, which has a wholly owned subsidiary in neighbouring Slovakia. Listed on the Prague Stock Exchange, the company has been suffering from competitive pressures and falling telecoms prices. PPF will buy a 66% stake from Telefonica for about €2.5bn, leaving the Spanish telco holding 4.9%, before making a mandatory offer to minorities for the remainder. Analysts say that PPF’s likely course of action will be to try to delist and then to wring cost out of the business.

The deal is to be financed by Kcs35.5bn (€1.29bn) in equity alongside the syndicated loan, sufficient to buy out all the minorities. SG CIB was awarded the original mandate and brought in another seven banks as mandated lead arrangers and bookrunners to underwrite the package fully before launching the deal more widely. They were Citi, Crédit Agricole, Deutsche Bank, ING, KBC Bank, Royal Bank of Scotland and UniCredit. 

The SG CIB team did not have to work too hard to bring in the additional underwriters. “This is the type of deal that everyone wants to do,” maintains Quentin L’Hélias, SG CIB head of structured finance, European loan syndicate, adding that there were a number of reasons why his bank believed in the transaction.

One was that it is the largest deal of its kind ever to come out of the Czech Republic. “With hindsight it looks easy,” says Mr L’Hélias. “But it felt like the right credit. The target was a telco we understood, so we were at ease from a credit perspective, and we felt that the market would be comfortable with the underlying credit risk.”

Another reason was the identity of the sponsor. Although PPF is not a household name, it inspires confidence among the cognoscenti and, Mr L’Hélias believes, is a “very convincing” sponsor for any bank acting in CEE.

Those twin attractions can be set in the context of a market that is hungry for assets. As the deleveraging process that has preoccupied them for the past few years comes to an end, banks are finding themselves underlent. Under the circumstances, SG CIB felt there would be a tremendous appetite for the PPF transaction. “Banks are looking for assets, so these are perfect market conditions for any borrower,” says Alvaro Huete, SG CIB head of global syndicate. 

Going local

General syndication was launched on November 13, 2013. There was one other aspect to this transaction that characterised this deal and that may be a harbinger of things to come – the coming together of international and local liquidity. The client was keen to maximise the Czech koruna component, and SG CIB’s package guaranteed delivery of a minimum 50% in local currency.

“In the syndication process the bookrunners made it clear that commitments in koruna would be favourably treated,” says Ignacio Blasco, SG CIB head of leveraged capital markets, European loan syndicate. “We had a lot of interest from banks who provided 100% koruna.”

Given the attractions of the deal, general syndication stuck to the calendar with no delays, attracting another 12 bank groups and signing on December 19. As it turned out, the koruna portion was nearly 93% of total facilities, making this the largest ever Czech koruna-denominated financing. “That exceeded the expectations of almost everyone and vindicated the placement strategy,” says Mr L’Hélias. “Everyone likes to be a part of success and, when a deal is going well, it tends to go very well. There is a lot of koruna liquidity – it’s just a question of finding the right home for it.”

The sheer size of the PPF facilities is cause for encouragement. There have always been small deals in the region but now more significant transactions are starting to appear. One was the €1.4bn equivalent financing (in dollars, euros and Czech koruna) for the acquisition of Net4Gas, which owns and operates part of the Czech gas transmission system. SG CIB was part of the club supporting the successful bid by Allianz Capital Partners and Borealis Infrastructure to acquire the business from German electric utilities company RWE. 

“Acquisition financing for regulated assets is currently one of the most in-demand sectors in the loan market,” says Mr Lamoril. Net4Gas is regulated on a more limited basis but, given its well-understood industry and respected sponsors, it was still able to attract eager bank support. Here too, favourable treatment was given to local currency commitments. As is now commonplace in the infrastructure acquisition market, the Net4Gas facilities were structured to be refinanced in the capital markets within three to five years.

Regional theme

The theme of plentiful local liquidity is certainly visible in Poland, which has so far been the one shining light of the CEE loan market. SG CIB was bookrunner, mandated lead arranger and hedging bank on a December 2013 1.45bn zlotys (€350m) deal, financing Alinda Capital Partners’ acquisition of Emitel. Emitel is the owner/operator of Poland’s only countrywide broadcast tower network.

Half of the banks in the syndicate pool were Polish. “The transaction was very well received by the local market as well as by the other MLAs,” Mr Blasco observes. “Throughout the process, we and other banks involved kept receiving reverse enquiries from lenders shut out of the syndicate, underlining the current buoyant liquidity available for Polish deals.”

Meanwhile, back at Telefonica Czech, the PPF deal has not yet funded. Having signed the share purchase agreement, the company is now awaiting regulatory approval before the acquisition can proceed. But at SG CIB there is a sense of satisfaction with what has been achieved. “We came to a solution offering a number of benefits demanded by the client – in tenor, currency, pricing and, above all, flexibility,” says Mr Blasco.

The hope is that there will be more to come from the region, and that subsequent transactions will continue to be able to exploit local pools of captive liquidity. Mr L’Hélias notes that while CEE (Poland aside) has somewhat disappointed bankers in the past, the PPF deal has changed that, opening the prospects for yet more sizable transactions. And that can only be helped by further tapping international and local liquidity in a coordinated manner.

“Across central and eastern Europe, the Middle East and Africa, there is a growing convergence of international liquidity and local liquidity,” says Mr L’Hélias. “They were once separate worlds, but now, increasingly, they overlap. We’re seeking to work much more closely with local stakeholders in our group. There used to be a ‘head office knows best’ mentality across the market. Tomorrow’s market makers will need to be able to deliver an integrated understanding of international and local markets.”

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