Sponsors aim to buy back cheap debt

[LONDON] Sponsors are looking to profit from what they consider overselling in Europe's leveraged loan market and are in talks with a number of banks about debt buybacks.

Driven by the coronavirus pandemic and plummeting oil prices, average prices of European leveraged loans in the secondary market have plummeted to under 80 per cent of face value, lows not seen since 2009. Sponsors including Apollo, BC Partners and Carlyle are seeing this as an opportunity to buy back debt in portfolio companies at cheap levels.

While debt buybacks are commonplace in the bond market, they are quite rare in Europe's leveraged loan market, which is why sponsors have approached banks for advice on how they go about doing it.

"Buybacks are very much on the radar and there have been a lot of conversations with private equity looking at their own portfolios to opportunistically buy back debt," a head of leveraged finance said.

Europe's top 40 leveraged loan composite was quoted at 78.76 per cent of face value on March 19, from 94 on March 9. The last time the composite was that low was when it was quoted at 78.68 on June 30 2009, according to Refinitiv LPC.

With the virus impacting cashflow and profitability, loans have justifiably traded lower, however many sponsors believe the correction has gone too far in some instances and current trading levels don't reflect the true value of some of the loans.

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"If sponsors are buying debt then it is a strong signal they have a high degree of confidence in a company and people are getting the value of the debt wrong," a syndicate head said.

Buying back debt at steep discounts could also prove lucrative for sponsors.

"Say they buy back €10m and pay €8m for it, there is a profit," the syndicate head said.

The head of leveraged finance said: "In some cases the returns they can make on a buyback is higher than the returns on equity will ever be."

BC Partners is looking to buy back debt in Dutch flower grower Dummen Orange. Those loans were trading at 38.75 per cent of face value on March 25, from 61 per cent at the start of 2020.

The telecom sector has the most oversold loans, bankers say.

Loans issued by companies such as French telecommunications company SFR, UK and Ireland cable operator Virgin Media and Swiss cable operator UPC were trading at around the mid 80s this week.

"Telco stuff sold off 20 points but it is fairly rock solid. Everyone is sitting in their houses watching Sky, using cable and the internet and no-one is about to cancel it. SFR, VNET and UPC - everyone around the globe are using them. TMT has definitely oversold," an investor said.

The question is whether sponsors are able to buy back debt in bulk or will have to stick to €10m and €20m tickets. If the plan is to do the former, public tender processes might need to be launched.

REUTERS