By Ben Edwards
French veterinary-health company Ceva Sante Animale SA on Friday
raised to raise EUR818 million ($1.1 billion) in a deal that could
pave the way in Europe for a pickup in riskier corporate loans that
come with less protection for investors.
Covenant-lite loans have been making a comeback in Europe. They
are so-called because they lack the usual terms and conditions
lenders seek when handing cash to highly leveraged borrowers, such
as limits on how much a company can owe relative to the value of
its assets. Friday's deal means companies in the region have now
snagged almost $8 billion of such loans this year, about 15% of all
European leveraged loans and the most at this point in the calendar
since Dealogic started compiling records in 2006.
The catch: those covenant-lite loans were predominately sold in
U.S. dollars, with smaller euro portions bolted on. Ceva Sante's
loan is unique because it is the first covenant-lite deal to be
issued entirely in euros since the financial crisis.
"It will be seen as a test case," said David Milward, head of
loans at Henderson Global Investors, which manages GBP75.2 billion
($124.9 billion). "If companies see a successful outcome on a
covenant-lite deal they will want the same. You push the door open
slightly and everybody else floods through."
Analysts and investors say that because demand for European
leveraged loans is outpacing the supply of new deals, that could
give companies greater clout to borrow cash on more favorable
terms.
That demand is partly being fueled by a hunger for higher
yielding assets during this period of persistently low interest
rates. Concern about the potential for rising benchmark rates in
future is also boosting the appeal of debt without fixed interest
rates, said Mathew Cestar, head of leveraged finance for Europe,
Middle East and Africa at Credit Suisse.
The shortage of available loans relative to demand from
investors has already helped spur a rapid rise in the volume of
covenant-lite deals in the U.S. to $118 billion in 2013 from $60
billion a year earlier, Dealogic data show. In Europe, loan
investors have had the upper hand but that could be changing.
"If you get significantly more money coming in and you don't get
sufficient supply of new deals, that balance will shift," said
Andrew Boughen, senior loans manager at M&G Investments, which
oversees about GBP244 billion of assets.
Regulations could limit the growth of the covenant-lite market
in Europe. For one, rules preventing European asset managers
selling leveraged-loan funds to retail investors could crimp
potential capital inflows. Europe's stagnant securitization market,
which has remained muted since the global financial crisis, means
there are also fewer opportunities to pool loans together and sell
them on to investors as bonds backed by the underlying cash
flows.
Even so, European banks, which have traditionally dominated the
region's corporate loan market, are cutting back on lending to meet
stricter capital rules. That could boost the share of loan deals
available to investors, said Credit Suisse's Mr. Cestar.
Money managers expect to see an uptick in covenant-lite loans
too.
"We're not going to get U.S. type levels in 2014 but we'll see a
start to it," said M&G's Mr. Boughen.
Crédit Agricole CIB, Goldman Sachs, Natixis and Nomura are the
banks underwriting the Ceva Sante loan.
The EUR818 million seven-year deal will pay investors 3.5
percentage points over the three-month Euribor, which Friday was
trading at 0.310%. The loan has a 1% Euribor floor and priced at
99.75% of face value.
Ceva Sante declined to comment.
Write to Ben Edwards at ben.edwards@wsj.com