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European companies rush to draw revolvers, raise additional credit lines

It is too early to assess with any accuracy the impact of the coronavirus crisis on the corporate health of leveraged Europe, bankers and investors agree. But access to liquidity through revolving credits and other back-up credit lines is going to be vital for many companies in the coming weeks and months.

Revolvers typically provide the first line of liquidity defense for corporates big and small, and a slew of sponsor-backed and other leveraged names across Europe have either requested or made drawdowns over the past fortnight.

For many, such as Ceva Sante Animale SA, which develops, manufactures and distributes a large portfolio of pharmaceutical products vaccines, and Rexel SA, a global distributor of low- and ultralow-voltage electrical products, these are just precautionary measures, according to sources who add others are keen to demonstrate to the wider market that they have ample liquidity buffers.

Since the sell-off in risk assets deepened earlier in March, virtually every borrower of size in the European market has updated their lender group with either calls or statements. Just last week, British petrol station operator MFG told its lender group it intends to draw down on its revolver to see it through the crisis.

Meanwhile, LOXAM, a French equipment rental company, decided to draw the full amount of its €75 million revolving credit facility and the company is also increasing its liquidity by further mobilizing available bilateral facilities in the face of the COVID-19 pandemic.

For others, it is becoming clear that existing back up lines will not be enough to see them through the economic shutdown. And to meet this shortfall, bankers say requests are coming in from sponsors and corporates for further liquidity financings on top of existing lines. "Some borrowers will be able to draw down on their revolvers and that will be enough," said one banker. "But creative solutions are going to be needed for others."

Before the chronic phase of the crisis got underway, some were already quick to move to clear revolver drawings with incremental facilities. Civica, for example, placed an £81 million TLB add-on to term-out revolver drawings, via a SMBC-led group at the start of March. Castik Capital-owned Waterlogic GmbH completed a similar exercise, also via SMBC.

Those that were slower to move to term out or pay down revolvers are now in talks to extend these lines. U.K.-based petrol station operator, EG Group Ltd., for example, is in talks with its lending banks to increase its revolver as the size of the facility has not kept up with the borrower's needs following rapid global expansion.

Search for liquidity

For others, the search is now on for new sources of liquidity. "There is a bifurcation between those companies that have rushed in and drawn down on their revolvers in full, and those corporate treasurers who are thinking more strategically," said one banker.

Such strategic thinking will also be needed as drawn revolvers bring back maintenance covenants to what is now an almost fully cov-lite world. Typically, revolver covenants spring when the facility is drawn by roughly 30% to 35% and could bring technical default of cov-lite term debt through cross-acceleration clauses if breaches are not waived or cured.

In a note published March 13, Deutsche Bank said breaches of these covenants could lead to a step up in defaults in the coming quarters. One market watcher has suggested this may mean some borrowers wait until April to draw, as this will delay the first test by a quarter. "Lots of companies with springing covenants don't want to draw beyond their testing thresholds," said another fund manager.

The market is also split, bankers add, between those companies that are fundamentally sound but need further support to get through this crisis, and others that face far more serious questions over their ability to survive. For those in the former category, sponsors are already in discussions with both banks and buyside relationships for incremental facilities, according to several sources across the market. Just last week, KKR-backed vending machine group Selecta TMP AG said it had signed a €50 million term loan provided by KKR Credit Advisors.

Large tickets

Commercial bank lenders too are in a significantly stronger position than they were following the global financial crisis, and, while they have lower single-borrower concentration limits than they did back then, they can still put large tickets to work for the right relationship. Fiat, for example, said last week it had signed a €3.5 billion credit facility via two banks to supplement its existing lines of €7.7 billion. "For banks, it is very much down to the relationship," said one source.

Other borrowers are looking beyond their bank and fund group to special opportunity or other direct lenders. Last week, U.K. restaurant chain Pizza Express said it had signed a £70 million super-senior revolver with HPS Investment Partners LLC. The new loan comes with certain conditions and will rank senior to the Hony Capital -backed firm's existing bond capital structure.

Bankers add that some are having to look outside plain-vanilla lending to products such as asset-backed loans or securitizations. In its results update published in March, Kloeckner Pentaplast, for example, said it had signed a five-year factoring line. "These are the type of deals that make sense for near-term liquidity," said one banking source.

In the cases of companies or sectors hardest hit by the crisis, both banks and funds agree they are looking to sponsors to stand behind their companies. "The message from institutional investors to sponsors is clear," said one source. "We are willing to support our credits as long as you are."

As ever, the stress could be on smaller companies that lack the earnings diversity to see them through the crisis and bankers say those companies with EBITDA less than €100 million or so are likely to be disproportionately impacted.

An example of what support is likely to be needed recently emerged on news that sponsors Cinven, CPPIB, and EQT are set to provide their portfolio firm Hotelbeds Group SLU with a €400 million loan. The new loan will rank pari-passu with the Spain-based B2B travel services provider's existing debt pile, and is designed to help the firm's working capital requirements resulting from the virus outbreak. Hotelbeds was last in the market in March 2019, when it allocated a €400 million add-on to roughly €1 billion of B/C term loans.

Restaurant stress

Likewise, there has been a focus on restaurant and retail chains that were among the first European leveraged finance borrowers to draw down on their revolving credit facilities to preserve cash.

Burger King France, which is owned by private equity firm Bridgepoint Capital Ltd., has fully drawn down its €60 million facility to cover urgent cash requirements, as all its restaurants across France have temporarily shut due to the outbreak of the coronavirus. The company told bondholders earlier in March that it currently has sufficient cash reserves to manage the liquidity situation but has also begun implementing cost-curtailment measures and is considering availing itself of the aid programs announced by the French government to help businesses.

Also in March, CBR Fashion BV the German women's clothing company that owns brands such as Street One and Cicil, drew €10 million of its €30 million revolver, a company spokesperson confirmed, as nonessential shops across Germany closed down.

These will not be the last. In late March, S&P Global Ratings downgraded a number of U.K. companies in the pub and casual dining space, including Stonegate Pub Co. Ltd., Ei Group PLC, Wagamama Group Ltd. and Pizza Express, with liquidity pressures a key reason.