Europe finds its own way in the second lien market
14 March 2005
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Linklaters.gif" alt="Europe finds its own way in the second lien market" />The emergence of second lien financing prompts a question that lawyers don't really have an answer for. Is second lien a stretched senior or is it just glorified mezz?
The problem is that the dozen-odd deals with a second lien piece since Brenntag in December 2003 have not followed any particular pattern. Some have had D tranches, which are pari passu with the rest of the senior, and others have had similarly named D tranches that are truly subordinated second liens.
What is clear, though, is that while the European market has imported the concept from the US, it is not going to follow the US model. The Brenntag deal - where the D tranche was subordinated and which has been the only second lien deal so far that has not been a recap - got several US law firms in London marketing heavily to the investment banks.
Unfortunately, they rather missed the point. It's all very well putting together presentations to the banks on the state of the second lien market in the US, but the intercreditor agreement there is based on the US bankruptcy code. With no single insolvency regime in Europe, and the existence of a healthy mezzanine market, second liens are unlikely to revolutionise the way leveraged deals are done.
Clifford Chance made a lot of the running to start with through its relationship with Goldman Sachs, an early adopter of second liens. Malcolm Sweeting and Bettina Steinhauer advised Goldman and Citigroup on the E1.4bn (£980m) financing of Bain Capital's acquisition of German chemicals group Brenntag. Brenntag's second lien was essentially a tranche D of the senior.
The biggie was Cognis, which has generated fat fees for Clifford Chance's acquisition finance business for the past couple of years. The original buyout from Henkel was done in 2001 when Goldman Sachs Capital Partners and Permira bought it for E2.5bn (£1.74bn). Citigroup, Goldman Sachs, HVB and JPMorgan backed the deal with E1.63bn (£1.14bn) of senior debt. Last summer, Alan Inglis led one of the most complex deals around when he handled the recapitalisation of Cognis using a E300m (£209m) second lien loans and notes - the only time second lien notes have been used in Europe.
Because the recapitalisation was aimed squarely at the US market, Cognis was the nearest thing a European deal has got to replicating a US structure and was specifically tailored to US investors. "That was Goldman trying to be funky," says one lawyer dryly.
Since then other firms have been catching up. Allen & Overy's Stephen Kensell handled the £1.3bn Invensys refinancing for Deutsche Bank, which had a separate facility for the second lien. White & Case's Maurice Allen advised BarCap, Citigroup, Credit Suisse First Boston and Deutsche on the £1.8bn refinancing of Telewest, which also had a separate second lien facility. Nigel Ward and Laurent Mabilat advised Goldman and Natexis on the E520m Frans Bonhomme deal.
But the firm which has been motoring on this has one of the hungriest acquisition finance teams in the City. Linklaters has handled three major second lien deals in the space of six months. John Stansfield, now based in Germany, handled the E1.33bn (£930m) recap of Springer for BarCap, while Gideon Moore handled the E240m (£167m) Alcontrol deal for Dresdner Bank. Moore got Linklaters off to a splendid start earlier this year when he reeled in the £1.25bn Gala deal for the Royal Bank of Scotland and Merrill Lynch.
What everyone agrees on is that second liens are part of a bigger trend of sponsors stretching the capital structure and hiking leverage multiples to record levels. The only thing they don't agree on is how second lien will eventually settle down. As one lawyer plangently puts it: "The market is crying out for a bit of direction in terms of where this product is going to be used."