Trlpc euro denominated leveraged loans cheaper than dollars

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Feb 25 Global borrowers are using cheaper pricing in the European leveraged loan market to increase the size of euro-denominated tranches and push pricing down on more expensive dollar tranches as companies arbitrage the Transatlantic markets to secure best pricing on large liquid loans. Companies with international operations typically tap the dollar and euro markets simultaneously and play them off against each other to get the lowest pricing possible. Dollars have historically been cheaper than euro-denominated loans, but a repricing in the US market in late 2014 as US regulators put the brake on aggressive loans, means that euros are cheaper."Europe has been more aggressive and this has definitely helped US bankers secure tighter pricing on cross border deals. There was the assumption that you used the dollar market to beat up the euro market but recent deals have seen a reversal and it's the euros which are now beating up the dollars," a European banker said. Austrian packaging group Constantia Flexibles narrowed pricing this week for the second time on its dual-denominated leveraged loan financing backing its buyout by French investment firm Wendel. Constantia's buyout loan double reverse flexed to 375bp on the dollar and euro tranche, having been initially guided at 425bp-450bp. It is unlikely the deal would have priced at 375bp if it was a pure dollar deal, bankers said."There has been a widening in the US so borrowers are looking to raise euros, it is a temporary pricing arbitrage that borrowers are trying to take advantage of. The euros are also dragging the dollars lower, too. It is a short term gain because euros are not as liquid," a second European loan banker said.

Constantia also increased the size of its euro tranche by 100 million euros ($113.55 million), reducing the dollar tranche by the same amount after stronger appetite for the euro portion."A company is actually incentivised to do transactions in euros, and this is the first time in a long time that has happened," said Sandeep Desai, co-head of US leveraged loan capital markets at Deutsche Bank.

EURO BENEFITS Last month, an 841 million euro-equivalent leveraged loan backing telecoms group Altice's acquisition of Grupo Oi's Portuguese operations closed with tighter pricing than initially anticipated. A $500 million tranche was expected to price wider than a 400 million euro tranche and was launched at 500bp-525bp compared to 475bp-500bp, respectively. After being flexed, both the euros and dollars closed at 425bp, with a 1 percent floor. The euro loan came in slightly tighter with a 99.5 OID compared to 99 OID on the dollar loan but ultimately, pricing on the dollar loan was far lower than originally expected, bankers said. The relative strength of the European market versus the US market was also outlined by Dutch software company Exact's $495 million dual-denominated loan backing its buyout by private equity firm Apax Partners.

Some 100 million euros of a $335 million first lien tranche allocated earlier this month but the dollar term loan was put on hold this week after the syndication process faced difficulties. European borrowers have traditionally gone to the US to drive pricing tension, whereas US borrowers have come to Europe to match euro-denominated cashflows. However, Europe's low borrowing rates are making it more appealing for US companies to issue loans in euros, as a tighter US monetary policy will push interest rates up, while quantitative easing in Europe suggests rates will stay low for some time."There is strong potential for this trend to continue as the Federal Reserve looks to tighten policy while the (European Central Bank) steps up extraordinary easing measures," said Benjamin Garber, an economist at Moody's Investors Service. More advantageous pricing and execution in Europe could even see US companies with a global reach pursue a transaction solely denominated in euros."We have not seen that yet, but we feel that is something the market has enough of an appetite to sustain," Desai said. Should this happen, cash-rich European investors are expected to have an enough appetite as the pipeline of new leveraged loans is drying up in Europe, bankers said. ($1 = 0.8807 euros)