JPMorgan leveraged finance team

Direct lending, refinancing and quality placements are keeping busy the bank’s leveraged finance team, which recently took on six new underwrites. Edward Russell-Walling reports.

Leveraged finance may not have many mergers and acquisitions (M&As) to feed off right now, but it remains one of the busier financial market segments. The Europe, Middle East and Africa (EMEA) leveraged finance team at JPMorgan has been leading the pack, working on an impressive number of new underwrites and bringing some creativity to the refinancing market.

Unlike some of its competitors, JPMorgan emerged from 2022 relatively unencumbered by loss-making deals. “We started 2023 without any overhang from last year,” says Daniel Rudnicki Schlumberger, JPMorgan’s head of EMEA leveraged finance.

Some other investment banks, which incurred losses as falling demand left them holding loans they had hoped to sell on, have decided to reduce the size of their leveraged finance teams. Not so JPMorgan. “We are open for business in leveraged lending and keen to show our clients we are there for them,” says Mr Rudnicki Schlumberger.

Ben Thompson, JPMorgan’s head of EMEA leveraged finance capital markets, notes that the market backdrop for leveraged finance is good at the moment. “It’s not as good as 2021 and early 2022, but it’s better than most of 2022,” he says.

Volumes are being driven by refinancing, not M&A, Mr Thompson points out. “There is a smattering of M&A,” he acknowledges. “But it’s not obvious that the M&A calendar will pick up in the medium term.”

Direct lending

JPMorgan recently added direct lending to its product suite, delivered via the leveraged finance team. Competing with the new breed of direct lenders such as Ares Management and Golub Capital, the bank will now fund certain leveraged loans on its own and hold them to maturity. Given that high-yield bonds have become harder to distribute, this is a useful alternative for would-be borrowers while being lucrative for the bank.

The team has recently taken on six new underwrites, a level of activity it has not enjoyed for at least a year and one which, it says, makes it unique among its competitors. They embrace both loans and bonds and include the first jumbo public-to-private underwrite since the Russian invasion of Ukraine.

We are open for business in leveraged lending and keen to show our clients we are there for them

Daniel Rudnicki Schlumberger

This was the $12.5bn acquisition of software provider Qualtrics by private equity house Silver Lake and CPP Investments, the Canadian pension fund. While Qualtrics was listed on Nasdaq, it was 71% owned by German software group SAP. Silver Lake and CPP Investments will acquire 100% of the outstanding shares.

JPMorgan was financial adviser to Silver Lake. The deal was largely financed by equity, reportedly worth more than $10bn. However, the bank also acted as lead left arranger and bookrunner for $1.4bn of first lien credit facilities to support the transaction.

This comprised a $1.2bn seven-year term loan B and a $200m five-year revolving credit facility, both priced at secured overnight financing rate plus 350 basis points (bps). It was the tightest seven-year money for a single B borrower in more than 14 months, according to the bank.

Creative refinancing

Last year’s rapid and substantial increase in interest rates has made refinancing more of a challenge for corporates and their advisers. JPMorgan has responded with some creative solutions that serve the needs of both issuers and investors.

In a recent transaction for iQera, a French credit management service provider, JPMorgan acted as lead dealer manager and sole physical bookrunner on an innovative four-non-call-one €500m exchange offer combined with a new money component.

Owned by private equity house BC Partners, iQera had some €550m of debt, all maturing in 2024. Its situation was not helped by the fact that, as a sector, debt collection is generally out of favour with investors.

“For reasons of prudence, management and sponsor wanted to extend as much debt as they could, but they did not need to push out the whole capital structure,” says Natalie Day Netter, JPMorgan’s head of EMEA leveraged finance syndicate.

Existing bondholders were offered a one-for-one exchange into higher-yielding notes maturing in 2027, together with a five-cents-on-the-euro cash incentive. The exchange offer was conditional on a 75% acceptance rate because, otherwise, it would not be solving iQera’s problem.

“The holder base was heavily collateralised loan obligation [CLO] funds,” Ms Day Netter explains. “So, we created mechanics that made it as easy as possible for them to extend.”

CLO funds are often structured so that they cannot reinvest unless they do it cashlessly. So, concurrently with the exchange, iQera issued new cash notes with identical terms. That allowed existing holders who could not participate in the exchange to switch their holdings into the new cash notes by way of a tender offer.

we need to be creative, understanding that companies are now very focused on the cost of debt

This was a first for the European leveraged finance market. As it turned out, iQera was able to extend €500m of its debt at a coupon below where it could have issued in the primary market. “And, at that time, the market would not have been open for a €500m issue,” Ms Day Netter says.

“It’s a super-technical but creative solution for a market that is still trying to work out what to do with itself,” Mr Thompson says of the iQera deal.

The credit management service sector is not popular with some debt investors, and there are a lot of economic concerns facing the sector. “So, we need to be creative, understanding that companies are now very focused on the cost of debt,” Mr Thompson continues. “There are still a few needles to be threaded.”

Quality placements

There has been, if not exactly a flight to quality, then certainly a shift, according to Ms Day Netter. She expects more pricing dispersion this year, as the haves and the have-nots move further apart in terms of broader pricing differentials.

Two recent deals where JPMorgan acted as joint global co-ordinator and lead left bookrunner illustrate the point. Loxam, a European equipment rental group, issued €300m of new five-year senior notes priced at 6.375%. This was tighter than initial price talk of between 6.5% and 6.75%.

The proceeds were destined to repay Loxam’s existing 4.25% senior notes maturing in 2024. At the same time, the company launched an exchange offer on €700m of 3.25% senior secured notes and 6% senior subordinated notes, both due in 2025.

Only two days later, family-owned Austrian automotive car parts maker Benteler came to market with a €2bn refinancing package that included debut euro and US dollar bond issues and a debut term loan A.

Benteler has the same low-BB credit rating as Loxam, and its new €525m bond had the same five-year maturity. But because Benteler is in the unloved auto sector, it had to pay 9.375% compared with Loxam’s 6.375%.

That said, the bond offering was oversubscribed and priced at the tight end of price talk. The US dollar tranche was sized at $500m, paying 10.5%. A €810m 4.5-year term loan A was priced at Euribor plus 450bps.

JPMorgan also acted as joint global co-ordinator on a €2.5bn term loan B for Action, a Dutch-based non-food retailer, another less-than-voguish sector. The orderbook was sufficiently well covered for the loan to be upsized from the original €1.5bn. This allowed Action to refinance its existing term loan B, maturing in 2025, in its entirety.

“There is a wave of refinancing yet to come,” Mr Rudnicki Schlumberger predicts, noting that 2023 so far has seen higher refinancing volumes than at this point in 2022. The team estimates that around €170bn of leveraged debt needed to be refinanced in 2023, 2024 and 2025, of which perhaps €30bn has already been done.

“So, there is quite a lot to do,” he adds. “Our issuers realise that, yes, it’s costly, but not if you take a long-term perspective.” Today, he points out, the cost of debt in leveraged finance is only at its 20-year average. “It’s a misconception to think that when we started the year the debt market was dysfunctional. If it was, debt would be a lot more expensive.”



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