London, May 23 - The restructuring and reduction of the loan backing drinks group Pernod's purchase of Sweden's Vin & Sprit shows that big acquisition loans are stretching market capacity, and pricing is likely to rise.
The loan -- Europe's largest non-investment grade corporate loan -- was cut by 500 million euros to 11.5 billion ($18.12 billion), and its interest margin and fees were increased after the loan failed to meet sales targets.
"It's not a great result, and it doesn't bode well for new deals," a senior banker close to the deal said.
"(It) means that pricing will continue to go up in Q3 and Q4," he added.
It joins a growing list of flexed deals in recent months, symptomatic of limited demand for high-grade acquisition loans in Europe's beleaguered syndicated loan market.
Imperial Tobacco, Finnish power utility Fortum and British builders merchant Travis Perkins have all flexed up the margins on their multibillion dollar acquisition loans by 15-25 basis points this year.
The restructuring is a high-profile U-turn for Pernod, the world's second-biggest wines and spirits group, which will have to foot the bill for the flex, said another banker close to the deal.
He added that bookrunners BNP Paribas, Calyon, JP Morgan, Natixis, Royal Bank of Scotland and Societe Generale could be left carrying about 1.5 billion euros of the loan.
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The flexing will have significant implications for the structuring and pricing of large acquisition loans, a number of senior bankers said.
Banks were unwilling or unable to make large commitments, despite the lure of significant ancillary business via Pernod's strong brands and cash generation, which traditionally oils the wheels of relationship lending, they said.
"We learned a fair amount on Pernod; namely, how constrained some banks are for large commitments that need to be funded. The number of banks putting large funded tickets to work is less than we thought," a head of syndication at one of the arranging banks said.
Banks were asked to commit 500 million, 300 million, and 150 million euros, but the top ticket proved too large, and banks favoured sums of 250-300 million euros, the same source said.
Banks are also keen to recycle cash quickly and were reluctant to make large commitments due to Pernod's limited refinancing prospects as a BB+ credit -- chiefly its inability to tap the bond market -- several bankers said.
Large commitments at the BB ratings level also require banks to set aside larger reserves under the new Basel II accord.
"Banks are focused on getting these exposures down faster. They want deals with shorter maturities and a more certain capital markets takeout," said another syndicate head at one of the arranging banks.
The flex is likely to mean that acquisition loans will be structured with shorter tenors, particularly on bridge loans to capital markets issues.
"Some of the new deals will be pushing towards shorter-term tranches -- 18-month bond bridges instead of three years. The bond markets are open, and we want people to go there now," the first syndicate head said.
Pricing was less of an issue for Pernod, but it did have an impact on the result of syndication, as banks continue to battle painfully high funding costs. Pernod's original interest margin of 90-125 bps margin over EURIBOR came in around 50 bps short of many banks' risk-return models for non-investment grade credits, bankers close to the deal said, and was lifted by 30 bps to 120-155 bps.