Mezzanine financing is returning to the European
market, following Securitas Direct’s €394 million
($568 million) mezzanine loan, and the further need to
refinance large bridge loans.
But lawyers are unsure how long the trend will last
and how restrictive the loans’ covenants will be.
Securitas, a Swedish security provider, obtained
the loan from Morgan Stanley and five other banks to help repay
its bridge financing. The company is reported to have
secured the loan as covenant-lite, according to sources close
to the deal.
“This [Securitas deal] flies in the face of
what the mezzanine community has been working towards since
2010’s RBS Worldpay deal, which was seen as the template
for the mezzanine, with improvements to the senior terms,”
said one London-based partner. “Securitas has driven a
coach and horses right through that,” said the
partner.
Typical mezzanine allows for more bank-friendly
terms, as bank loan maintenance covenants, not bond style
incurrence covenants.
The Securitas loan may have featured covenant-lite
terms because the company also has a bond portion, and was
trying to avoid subjecting itself to two tests – one under
the mezzanine, one under the bonds. “They were seeking
consistency under their facilities,” said one layer.
However, the position on the intercreditor could
easily have followed the traditional mezzanine structure
established by Worldpay, with regards to enforcement, the
release of security and the relationship between the senior and
mezzanine portions.
Despite Securitas, it’s expected that
mezzanine lenders will have more clout, not less in the coming
months. If conditions do worsen, some mezzanine lenders could
include more restrictive covenants.
These can include requirements that the borrower is
not to borrow more money, refinance senior debt from
traditional loans, or create additional security interests in
the company's assets.
“Obviously that would require the senior’s
agreements in some cases,” said one source. Some financial
institutions such as Morgan Stanley and Goldman Sachs offer
senior and mezzanine debt facilities, albeit from within
discrete departments.
“Anything could be up for grabs,” said the
lawyer.
However, although mezzanine structures have
appeared because macro-economic factors have deterred high
yield investors, if the situation worsens further then some
believe there will be no economic incentive for mezzanine
lenders either.
Similarly, if the high yield market does return,
mezzanine will also be usurped due to its higher interest rates
of 12 to 14%.