Europe's direct lenders fight to maintain edge as underwriting competition steps up

Against the odds in Europe's late-summer private credit market — during which transactions are supposed to be halted — a few situations have been taking shape in the deal pipeline, and are expected to happen in the coming weeks. What's more, private credit appears to still be winning big-ticket financing mandates, despite a renewed and fiercely competitive offering from distributed markets, recent deals suggest.

Take the case of One Rock's acquisition of Constantia Flexibles from Wendel. The acquisition’s financing, which was strongly contested between private credit and the broadly syndicated market, emerged as a win for the former with roughly €1.5 billion debt package, according to sources. The deal might though have been viewed as a no-brainer for banks, given the firm’s history in the syndicated market, and indeed it is thought to have drawn significant interest from them, sources said. Former owner Wendel had put the Vienna-based flexible packaging firm up for sale earlier this year, through advisors Evercore and Marlborough Partners.

While HPS Investment Partners is said to have offered a €1.5 billion debt deal with a PIK or preferred equity element likely to be included in the private package, banks are understood to have offered a roughly €1.4 billion underwritten financing in term debt, plus undrawns of around €250 million. "It is especially disappointing as Constantia appeared to be an ideal name for a distributed financing,” said one banker, echoing views across the market. Away from the winning sponsor, sources said all the rival bidders had been favouring a broadly syndicated financing after running dual-track processes.

Elsewhere, in a financing to support a dividend payout, Blackstone- and Rivean-backed Esdec agreed to a €600 million term loan via a club of lenders, including Apollo, JP Morgan, PSP Investments and Blackstone’s credit unit. The private club comes despite Esdec's status as an existing loan name, and the firm was last in the market in August 2021 when it priced a $375 million seven-year dividend-recap at L+500 with a 0.75% floor. The recap follows Blackstone's investment in the firm last year, in an equity deal to become co-controller with Rivean (formerly Gilde Buyout Partners).

Risk appetite
This activity comes as the underwriting of transactions such as Infra Group and WorldPay indicate the return of risk appetite from the syndicated market, which may work with private credit on deals. “We are increasingly seeing more banks participate alongside private credit funds to underwrite large deals in the current environment, signaling their return after being shut [for such deals] for over a year,” added a debt advisor.

Already in the small- to mid-sized market, bank lending (largely as clubs) — which seemed to have been written off in the private credit boom — is now clawing its way back as higher margins and base rates make some private credit funds look expensive and selective. Direct lenders continue to offer larger amounts of debt either as bilateral processes or clubs, but banks can compete on pricing. Underwriters are also competing to take back market share and earn fee income.

“While the syndicated market continues to recover, for a new issuer it is not as stable or predictable as it was two years ago,” said another debt adviser. The adviser however added that as the syndicated market gets firmer, the larger deals will be back to where they were before, and the traditional route for such bigger transactions could again be syndicated loans or bonds.

Also among recent deals, non-food discount retailer Acqua & Sapone signed a €495 million loan through a club of banks led by Intesa Sanpaolo, in a deal that takes out a private credit financing. In a statement, the Italian company said the loan was signed via holding company Bubbles BidCo, through a club made up of Intesa Sanpaolo, Banco BPM, UniCredit, BPER Banca, Crédit Agricole Italia, Banca MPS, OLB Bank, Deutsche Bank, illimity Bank, JP Morgan and Banca Ifis.

Rounding up the late-summer deals, Palex has been in the spotlight since Apax Partners and Fremman Capital agreed terms to acquire the Barcelona-based medical technology equipment firm at the end of July with a dual-track process in play, according to sources. In the event, Jefferies, Goldman Sachs, KKR Capital Markets and UniCredit joined by Banco de Sabadell, Mizuho and SMBC were mandated to lead a €350 million term loan backing the deal. Bank of America, Jefferies and Credit Suisse were financial advisers on the transaction, which is expected to close in the fourth quarter.

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This article originally appeared on PitchBook News