Aug 3 Dutch leather chemicals company Stahl's withdrawal of an opportunistic 585 million euro-equivalent ($641.75 million) dividend recapitalisation shows that investors are becoming more selective about credit as macroeconomic concerns mount. Investors are becoming less willing to accept aggressive terms on leveraged loans for companies with lower credit ratings or chequered credit histories in a bid to avoid potential credit losses. Aggressive deals were done earlier this year to take advantage of hot market conditions. Robust liquidity and strong investor demand helped sponsors to cut borrowing costs by refinancing leveraged loans or taking cash out of businesses as an alternative to selling or floating companies. Opportunistic refinancings were completed earlier this summer for several strong, well-known credits, including Altice and Numericable, but a flurry of more attractive M&A deals in July diverted investors' attention. Investors are now refocussing on credit and rejecting more aggressive deals particularly shareholder's requests to releverage by taking equity out of the businesses."Investors and banks don't like recapitalisations, they're opportunistic. Banks are pickier now and there is less tolerance for weaker credits," a senior loan banker said. This is the second time this year that opportunistic deals have run into resistance from investors - several opportunistic deals were pulled in June, when Greece's position in the eurozone was unclear.
These deals included a repricing for Wendel's Spanish fibre network operator Ufinet and a dividend recapitalisation for IK Investment Partners' German industrial weighing specialist Schenck Process. FALLING SHORT Wendel bought a stake in Stahl in 2006 and restructured the company in 2010 when it cut debt in the business to 195 million euros from 350 million euros and injected 60 million euros of new equity, which boosted its equity stake to 92 percent from 48 percent. Lenders and management owned the remainder.
The French private equity company launched a 585 million euro-equivalent dividend recapitalisation of Stahl in July after failing to agree a sale of the business, despite attracting interest from buyout firms including Apollo, CVC and Cinven as well as an Asian chemicals group. Offers valued the business eight times Stahl's core earnings, falling short of Wendel's target of 10 times. Credit Suisse led the covenant-lite recapitalisation, which was intended to pay out 280 million euros in dividends, including 210 million euros to Wendel, and releverage Stahl to 4.1 times debt to earnings from around two times. The deal was sold in the US leveraged loan market, but was withdrawn from syndication on July 24, after US investors failed to support the deal.
"Everyone in the US knew it had a tainted story and not much was disclosed in the due diligence so people didn't want to touch it," an investor said. Investors were not happy about the amount of cash being withdrawn from the business and wanted to be paid more on the 540 million euros, dollar-denominated term loan B, which had price guidance of 400 basis points (bp), with a 1 percent floor at 99.5 OID."Had it not involved a dividend and the loan not been so tightly priced, Wendel might have been OK and got the Stahl deal done. Another 50bp could have got it over the line with investors," a second senior loan banker said. Wendel's plans for Stahl are unclear. It may relaunch the dividend recapitalisation or sale later this year if market conditions improve or hold the business for longer. Wendel extracted some value from Stahl in 2013 when it received 50 million euros following its merger with Swiss-based chemicals group Clariant's leather chemicals business, but the French buyout house is looking for an exit after owning the company for almost 10 years, sources said. Stahl is also starting to attract the attention of more specialised credit investors."Wendel can either hold on to it and play a waiting game or become more realistic in its expectations," the second banker said. ($1 = 0.9116 euros)