The mixed reaction in syndication to FNZ’s $2.1 billion, cross-border term loan to refinance private debt highlights key differences when it comes to lenders' credit selection — not only between the US and Europe, but also between institutional loans and bonds.
The three-part, cross-border deal for the UK-based wealth management platform has now fully wrapped up, after an elongated syndication that got underway on an Oct. 15 call. Completion brought varying outcomes between the tranches, with an upsized $1.1 billion dollar piece pricing at the wide end of initial talk, at S+500 offered at 98. The sterling piece was also upsized and settled at $525 million-equivalent, and priced on Nov. 7 wide of OID talk at S+600 and 96.5.
An initially planned $650 million-equivalent euro tranche did not syndicate, was downsized to $521 million and taken down by relationship bank lenders as a term loan A priced at E+475 and 98.
The withdrawal of the euro tranche marks the first failed new-issue institutional syndication in Europe since Getty Images pulled a $1.38 billion cross-border deal in February. Since then, pricing has generally moved tighter — although Stage Entertainment’s €335 million term loan extension at the end of October brought the first upward flex in Europe since Kohler Energy had widened pricing in February.
Ticket prices
Stage Entertainment was not, sources agree, an augur of a more difficult market. Rather, the flex — limited to 25 bps on the margin — reflected a smallish name exposed to ticket prices for its line-up of large scale glitzy musicals.
FNZ is a different proposition, however. It is a global front-to-back platform-as-a-service provider for the wealth and asset management industry and was valued at $20 billion following a 2022 funding round that brought CPPIB and Motive Partners in as minority investors. In August, the company announced a further $1 billion of funding from shareholders.
Against a debt requirement of $2.1 billion, the valuation and fundraising record provides an attractive LTV ratio. This is said to have been a draw for dollar lenders, who are better-versed in the sector due to comparable credits that are active in the US market, according to sources. In contrast, Europe’s technology sector — though significant — accounts for a smaller part of a smaller market. In the Morningstar European leveraged Loan Index (ELLI), the largest technology-linked segment is Software, which makes up 7.4% of the index, while IT services is the second-largest tech-linked sector at roughly 2% of the index, which totals €297.5 billion of outstanding European loans, LCD data shows.
In the US, software is the single largest sector in the Morningstar LSTA US Leveraged Loan Index (LLI), making up 12.3% of total outstandings of close to $1.4 trillion. IT Services is the fourth-largest sector in that index, with a share of 4.6%.
“In Europe we are primarily generalists,” said one manager. “In the US, the market is of a size that they can justify dedicated analysts that are true technology specialists.”
Credit story
The job was all the more harder for FNZ as the London-headquartered firm comes with a complicated credit story. The significant investment involved in building the business has resulted in deeply negative cash flow over the past few years, and the firm reports negative EBITDA, according to investor sources. FNZ has strong market positions though, with a 60% slice of the UK market, according to investor sources. It also hopes to build on its base in other countries, reaping the rewards of the previous investment, but also presenting some execution risk as it infiltrates new markets, according to prospective lenders.
Sources note that once installed, the company’s products are generally sticky — meaning they should provide a predictable and recurring annuity-like revenue stream. Lower capital costs plus some cost savings should help cash generation, which rating agencies say could turn positive from full-year 2025.
According to several European lenders, this is not an easy story to get comfortable with, especially for a name with a consortium of owners rather than a single majority sponsor. “There is an investable credit but it’s extremely complex,” said one CLO manager. “We want to lend to sponsor-backed credits so the motivation for us to get on the phone with management and dive into the financials was not there,” said another.
For others, FNZ is emblematic of deals that have come from the private credit market to loans, with many features that demonstrate why it was financed by direct lenders in the first place. “No credit is perfect but all too often from private credit — whether it is disclosure, size, business concentration or other off-market features — there is something that makes us stop,” said another manager. “Direct lenders are just better placed for some borrowers.”
So far this year, LCD has counted roughly €9 billion of deals moving from the direct lending market to syndicated loans. This includes some credits — such as April Insurance — that were typical syndicated targets and only went to private credit during the market dislocation that followed Russia’s invasion of Ukraine. Similarly, other existing syndicated borrowers, such as Group.one, took out private credit facilities layered into their debt stack for the same reason.
Bankers have also sought to bring names that have outgrown private credit, and now have a e features such as delayed-draw facilities. “A lack of M&A is encouraging banks to take a view on smaller companies and bring them to the distributed market in the hope of future add-on, M&A advisory and other expansion business,” said a lender.
Sterling effort
As for the sterling tranche, for FNZ this fell between the dollar and euro loans and cleared the market, though wide of talk. CLOs’ inability to provide sterling means the TLB market is not the first place for any borrower seeking the UK currency in size, though the market does host some sizable facilities. “There is liquidity in sterling, but it typically needs to come at a price that can attract credit funds,” said a banker.
In the case of FNZ, sources said the sterling tranche was able to find support from existing direct lenders. The pricing on the sterling loan points to a rough yield over four years of close to 12.4% (without the forward curve), which compares to the 10.75% yield achieved by B-/B3 rated London-listed grocery technology firm Ocado for its £450 million of five-year unsecured bonds that printed at the start of August. After some initial weakness, the bid for Ocado has generally held around par reoffer in secondary.
Ocado is a loss-making and capex-heavy name, which meant that some at the time questioned whether it was a suitable candidate for public bonds — despite a track record dating from 2017, when it was largely seen as a grocery delivery outfit. Even so, the bonds cleared and were upsized by £100 million. For some on the sell side, difficulties for FNZ in Europe point to a syndicated loan market that is becoming overly cautious towards more storied credits. “If you have a difficult deal then you really have to go to the bond market as they are willing to put the work in,” he said, pointing to recent successful trades such as ASK Chemicals and Takko, which both cleared with double-digit yields. “CLOs are not rewarded for taking extra risks,” he added.
Duration risk
As well as a broader buyer base buoyed by record ETF inflows this year, the inverted Bund yield curve creates a hunt for yield on the part of bond investors, because they are now rewarded for taking duration risk on better-quality credits. The bond market has recently hosted a deal from the restructured Takko and a loan-for-bond refinancing for ASK, while UK names such as SIG and Boparan have both successfully refinanced debt that had traded close to distressed levels. “As soon as there is a double-digit yield, everyone rushes in,” said a high yield fund manager at a large pension fund.
Loans meanwhile have welcomed a great number of new credits from the private credit space, but investor sources say that a couple of loan for private debt refinancings shown in early bird syndications over the summer found little traction, and opted to stay with direct lenders in the expectation of going to high yield at a later date.
In reaction, managers say the structure of syndicated loans in Europe — which limits transferability, with strictly controlled white lists — means to a certain extent their job is to “avoid the bombs,” as one source summed up. “A lack of transferability means there is no proper functioning distressed market in Europe, and just one bad deal can destroy your place in performance rankings for the year,” the same manager added.
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