Goldman's variety pack helps Com Hem defy eurozone mayhem

Getting any business done in anxious and volatile capital markets can seem like a triumph, so when Com Hem was eventually able to refinance its hung leveraged buyout bridge in October and November, the company and its bankers had some cause for satisfaction. The loan and bond package included the first Swedish krona-denominated high-yield issue and, even as markets gyrated wildly, the first CCC issue since the spring.

Com Hem is Sweden’s largest cable operator, and its profitable and utility-like business explains its attraction to investors in a dangerous climate. It has had a number of different owners since it was spun out of Swedish telecoms incumbent Telia in 2003, as a condition of Telia’s merger with Sonera. The company was bought by private equity house EQT, which sold it to Carlyle Group and Providence Equity Partners in 2006. They acquired UPC Sweden, another cable company, at about the same time and merged the two entities.

Pass it on

The enlarged Com Hem parcel has now been passed on again, this time to private equity firm BC Partners, which agreed in July to pay SKr15.9bn ($2.3bn) plus fees and expenses. It was the first acquisition by BC Partners’ new ‘ninth’ fund. In the spring, Carlyle and Providence began preparations to float Com Hem, but by June it was clear that this was a bad time, emphasised by the fact that Dutch cable operator Ziggo had just had its own initial public offering put on hold.

Carlyle and Providence changed tack to a trade sale and the contest quickly boiled down to two private equity bidders: BC Partners and a partnership between Cinven Group and Nordic Capital. The Cinven/Nordic bid was entirely bank-financed, while BC Capital proposed a combination of loan and bond finance, both secured and unsecured – what one banker called “a rainbow of fruit flavours”. Six banks underwrote the debt – Goldman Sachs, Nordea, UBS, Deutsche Bank, Bank of America-Merrill Lynch and Morgan Stanley

“BC Partners’ financing gave a turn more leverage, which meant it could bid more competitively,” says Littleton Glover, head of Europe, the Middle East and Africa technology, media and telecoms finance at Goldman Sachs, which was joint mandated lead arranger for the senior credit facilities and global coordinator for the note issue. “We chose to put a few eggs in a lot of baskets – which made a good omelette.”

Cold reception

Funding the package was easier said than done, however. With the eurozone crisis continuing to deteriorate as summer progressed, the attitude of lenders and investors towards refinancing highly leveraged buyouts turned distinctly chilly. Loan pricing collapsed and the European high-yield bond market went into lockdown. The cost of insuring against high-yield default rose to its highest since the black days of October 2008. French engineers Spie, UK motoring organisation RAC and German outdoor clothing company Jack Wolfskin were among the European buyouts whose loans had trouble getting fully placed in the market.

An early bird syndication was launched as Scandinavia returned to work at the beginning of August, but it seems that the deal was too highly leveraged (total leverage was north of six times) for Nordic banks, whose response was lukewarm. Many of them had backed the opposing bids and were happy to sit this one out. It would be a long three months before the syndication was finally placed.

The senior credit facilities would end up consisting of a SKr1.6bn amortising term loan A, a SKr4.3bn bullet term loan B (in krona and euro), with unfunded revolving credit and capital expenditure facilities of SKr500m and SKr750m, respectively. Term loan A and the unfunded facilities carried an initial margin of 425 basis points (bps) and a six-year tenor, against the 6.5-year term loan B with its 500bps margin.

The bank strip, which included term loan A, the unfunded facilities and some of term loan B, went mainly to international banks, apart from Nordea. Term loan B included a euro-denominated institutional carve-out of €320m. There was some debate over the optimum sizes of the bank and CLO (collateralised loan obligations) tranches. “Some suggested that the Swedish krona loan capacity was higher than we thought,” says Dominic Ashcroft, executive director, capital markets syndicate at Goldman Sachs. “Our view was that bank capacity was less. CLO capacity would only be there in euros, so we needed an alternative source of capital for incremental secured SEK funding.”

Shuttle diplomacy

While the euro tranche was necessary to draw in the institutional element, the sponsor naturally wanted as much krona funding as possible. Goldman sounded out a big North American investor who was trying to source alternative currencies and, as a result of those discussions, was able to come up with a novel suggestion.

“We were bullish that we could place a krona bond,” says Mr Ashcroft. “So we proposed taking down the krona bank piece, inserting a bigger CLO euro tranche, and then giving the sponsor more krona via the bond market.” There was also a lot of shuttle diplomacy, as it were, between the loan and the bonds. “Most of the investors in the secured bonds could also do loans,” Mr Ashcroft explains. “In October the loan market was weaker, with several deals failing to clear in the market, so we put more pressure on the bond market, which felt a bit stronger, and tried to get incremental demand on that side.”

By adopting a club-style approach to the krona senior secured bond, and inviting two key North American anchor investors into the deal, the bankers were able to change the dynamics. Both bought the loan as well as the bond.

“These are sophisticated investors who invest across sectors, and they meant that CLO was not the only bid,” says Mr Glover. Pricing in this market was always going to have to be generous, but in this way the bankers were able to keep some kind of lid on it.

Both the loan and the krona secured bond (B1/B) were finally priced on October 27, after the EU summit meeting where agreement over the Greek impasse appeared to have been reached. The price for Com Hem and its bankers was not cheap. The loans were allocated at an original issue discount of 93% of loan value or par, and the seven-year, non-call 3 was priced to yield 9.875% with a coupon of 9.25%. It was the first ever krona high-yield deal, raising SKr3.5bn. “The institutional tranche was the first for a European company to fully clear in the market since July,” says Mr Ashcroft.

Clearing the decks

The senior unsecured notes (Caa1/CCC+) were launched with a three-day roadshow the following Monday, just as conditions were about to get much worse. When the Greek prime minister said he would put the EU proposals to a referendum, the markets went haywire. “On the Thursday, the market was down 3% and then up 3%,” recalls Mr Glover. “It was unprecedented. We priced on Friday.”

With a coupon of 10.75%, but priced to yield 11.75%, the eight-year non-call four notes raised €287m, attracting a number of US investors who were pleasantly surprised by the returns on offer. “US investors are looking at Europe for better credits and asking why they are trading so wide,” says Mr Ashcroft.

Com Hem’s underwriters have done a better job of clearing the decks than the rest of the summer’s buyouts, and the last piece of the puzzle – an SKr1.4bn payment-in-kind note – has finally been placed with a single investor. “Com Hem is the only European bridged financing structure to fully place its bond take-outs since July,” says Mr Glover. “In times of volatility, providing investors with a rainbow of fruit flavours seems to be the way to succeed.”