Rlpc mezz loans revived as bonds wilt

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* BSN taps 391.5 mln euro mezz loan* Volatile high yield markets prompt switch to mezz* Bidders for Iglo consider mezzanineBy Isabell Witt and Claire RuckinLONDON, June 12 Challenging high yield bond markets are prompting borrowers in European leveraged buyout (LBO) deals to access mezzanine loans, lured by better pricing and greater stability. Private equity firm EQT opted for a mezzanine loan over a high yield issue to finance its 1.8 billion euro buyout of German bandages maker BSN Medical. Other private equity firms bidding in auctions including Europe's biggest frozen food company Iglo Group are expected to follow suit, a sign that mezzanine loans and private high yield bonds are making a comeback. Borrowers have in the past typically favoured cheaper and more transparent high yield bonds, but as the euro zone crisis takes its toll on credit markets they are now switching to cheaper and more stable alternatives.

The BSN buyout is backed by 740 million euro of senior and 391.5 million euro of mezzanine loans. The mezzanine is provided by Highbridge Principal Strategies, JP Morgan Mezzanine, KKR Asset Management, MezzVest and Partners Group."In the current market, we wanted more certainty for the financing and a senior, mezzanine structure was therefore a better option. In terms of pricing, the high yield bond was not favourable. The mezzanine provided stability and certainty and to some extend transaction speed," said Marcus Brennecke, partner at EQT Partners in Germany. The mezzanine loan carries an interest margin of 11.5 percent, lower than the rate charged by banks to issue a high yield bond - which was considered by sponsors during the auction phase - as the euro zone crisis leaves high yield bond markets broadly shut. BSN would have to pay as much as 18 percent in order to access the high yield market in the current climate, one mezzanine investor and one banker said.

The decision to opt for a senior and mezzanine financing structure clinched the deal for EQT against rival bidders in the process, banking sources said."EQT offered a very simple, fully committed and funded financing package, which they could move quickly with. It was very attractive," a banker on the deal said.

OPPORTUNITIES Uncertainty in the high yield bond market is providing an investment opportunity that mezzanine investors, which have experienced a pick-up in enquiry, have awaited for some time. BSN's mezzanine is the largest since Swedish alarm maker Securitas Direct's 393.5 million euro mezzanine-type bond in August."We are extremely busy and the uncertainty in the macro environment helps us. The high yield market is very choppy...and we are seeing a clear trend that sponsors for the bigger deals have discussions very early on with mezzanine houses because they want to have predictable financing arrangements prior to bid deadlines," said Rene Biner, head of private finance at Partners Group. Potential bidders for the 3 billion pounds Iglo sale have started discussions with mezzanine investors to arrange around 600 million pounds of mezzanine financing or private high yield bonds to back a buyout. Mezzanine loans are also appearing on mid-sized LBOs: French optical retailer Alain Afflelou obtained a 110 million euro mezzanine loan in May, while the roughly 400 million euro loan for Swedish installation service provider Bravida and the roughly 220 million pound loan for Dairy Crest's French spreads business St Hubert could also include mezzanine debt, banking sources said."Over the past year the banks got aggressive and were doing highly leveraged all senior deals. That time is over now. Regulation is killing the ability of banks to take on risk. This means there is more space for the mezzanine investors as the banks become less aggressive," the first banker said.