Oct 31, 2014
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Changes to Fat Face's leveraged loan hits banks

Oct 31, 2014

LONDON, United Kingdom - Changes to British outdoor clothing chain Fat Face's leveraged loan will bring losses for its arranging banks as investors demand higher returns after recent global market volatility, bankers said on Friday.

Leveraged loans on both sides of the Atlantic have had to make expensive changes to help them sell after being caught in a market correction.

Making changes or 'flexing' loans eats into arranging banks' profits and can cause losses on underwritten loans, depending on the scale of measures taken to place the deals.

Arranging banks Citigroup and Goldman Sachs have had to increase an Original Issue Discount (OID) on Fat Face's 210 million pounds (336.17 million US dollar) dividend recapitalisation for a second time, which will cause losses for the banks, bankers said.

"The banks are going to feel the pain on Fat Face," an investor said.

A 480 million euro-equivalent (604.08 million US dollar) loan backing private equity firm Advent's acquisition of Belgian aluminium systems manufacturer Corialis closed in October after discounts were increased.

The scale of the changes wiped out arranging banks Jefferies, Rabobank and UBS' profits on the deal, bankers said.

The three banks are also holding a large part of the second lien loan which failed to sell in syndication, several sources said. The banks will either have to hold the paper, or discount it to sell.

"Making steep changes to pricing and OIDs is clearly not good for banks as they face taking painful losses," a banker said.

Citigroup, Goldman Sachs, Jefferies, Rabobank and Advent declined to comment. UBS was not immediately available to comment.


The discount on Fat Face's 180 million pound term loan was increased to around 90 percent of face value this week. The loan was originally launched in mid September with a discount of 99.5.

Fat Face's loan will pay a dividend of around 65 million pounds to its private equity owner Bridgepoint and also refinances existing debt, including a more expensive junior tranche.

The company has performed well and debt to earnings have grown 58.5 percent to 39.3 million pounds from 24.8 million pounds in 2011. This has allowed Fat Face to deleverage to around 2.5 times net total debt and around 1.7 times net senior debt in May.

Fat Face's loan struggled however as increasingly selective investors were wary of investing in the retail sector and sterling loans, which have swap costs of around 70-80bp for funds investing in euros.

Bridgepoint was not immediately available to comment.

Corialis' discount was widened to 96.5 on a 318 million euro-equivalent term loan and 95 on an 82 million pound second lien loan. Both tranches originally launched with discounts of 99 in early September.

Some banks are facing difficult decisions on several loans which are selling slowly. Other loans may also require further changes, including a 985 million pound dividend recapitalisation for UK pharmaceuticals firm Amdipharm Mercury, bankers said.

Banks, particularly investment banks, are penalised for holding excess exposure, which they may need to move before the end of the year.

"There is only so long you can hold paper for. Not many banks will want to keep exposure on balance sheets over Christmas and into the New Year," a second banker said.

1 US dollar = 0.6247 British pound / 1 US dollar = 0.7946 euro


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