Czech: Leveraged finance in the Czech Republic

While the European leveraged loan market has been at its busiest for five years, it has not been firing on each single cylinder. Renewed request for acquisition finance has not, so far, lived up to bankers’ expectations.

And the market in central and eastern Europe (CEE), where they had high hopes, has largely disappointed. So the signing of €2.29bn equivalent in senior loans to support PPF Group’s purchase of a majority stake in Telefonica Czech Republic was welcome on all counts. It as well shone a light onto the role of local liquidity.

The transaction’s world coordinator and initial underwriter was Société Générale Corporate and Investment Banking (SG CIB). Société Générale has built a substantial footprint in CEE, where it has majority stakes in Czech Republic’s Komercni Banka and Romania’s BRD. Further east, it controls Russia’s major foreign-owned bank, Rosbank.

“We are supporting the clients of those networks,” says Damien Lamoril, SG CIB’s chief of European loan syndicate. “CEE and Russia are very significant regions for Société Générale.”

PPF Group, a privately held investment group with assets of €22bn, is one of the major investors in CEE. Based in Amsterdam, it was founded in 1991 by Czech businessman Petr Kellner, currently said to be the wealthiest person in the Czech Republic. PPF’s interests are international and diverse, and include financial services, property, energy, mining and retail.

Twin attraction

In November 2013, PPF announced that it had agreed to buy a controlling stake in telecoms operator Telefonica Czech Republic, which has a all owned subsidiary in neighbouring Slovakia. Listed on the Prague Stock Exchange, the company has been suffering from competitive pressures and falling telecoms prices. PPF will buy a 66% stake from Telefonica for about €2.5bn, leaving the Spanish telco holding 4.9%, before making a mandatory offer to minorities for the remainder. Analysts say that PPF’s likely course of action will be to try to delist and again to wring cost out of the business.

The transaction is to be financed by Kcs35.5bn (€1.29bn) in equity alongside the syndicated loan, sufficient to buy out all the minorities. SG CIB was awarded the original mandate and brought in an extra seven banks as mandated lead arrangers and bookrunners to underwrite the package fully before launching the transaction additional widely. They were Citi, Crédit Agricole, Deutsche Bank, ING, KBC Bank, Royal Bank of Scotland and UniCredit.

The SG CIB team did not have to work too hard to bring in the additional underwriters. “This is the type of transaction that everyone wants to do,” maintains Quentin L’Hélias, SG CIB chief of structured finance, European loan syndicate, adding that there were a number of reasons why his bank believed in the transaction.

One was that it is the major transaction of its kind ever approaching out of the Czech Republic. “With hindsight it looks easy,” says Mr L’Hélias. “But it felt like the right credit. The target was a telco we understood, so we were at relieve from a credit perspective, and we felt that the market would be comfortable with the underlying credit risk.”

An extra reason was the identity of the sponsor. Although PPF is not a household name, it inspires confidence part the cognoscenti and, Mr L’Hélias believes, is a “very convincing” sponsor for any bank acting in CEE.

Those twin attractions can be set in the context of a market that is hungry for assets. As the deleveraging process that has preoccupied them for the completed few years comes to an end, banks are finding themselves underlent. Under the circumstances, SG CIB felt there would be a tremendous appetite for the PPF transaction. “Banks are looking for assets, so these are perfect market conditions for any borrower,” says Alvaro Huete, SG CIB chief of world syndicate.

Going local

General syndication was launched on November 13, 2013. There was one other aspect to this transaction that characterised this transaction and that may be a harbinger of things approaching – the coming together of international and local liquidity. The client was keen to maximise the Czech koruna component, and SG CIB’s package guaranteed delivery of a minimum 50% in local currency.

“In the syndication process the bookrunners made it clear that commitments in koruna would be favourably treated,” says Ignacio Blasco, SG CIB chief of leveraged capital markets, European loan syndicate. “We had a lot of interest from banks who provided 100% koruna.”

Given the attractions of the transaction, general syndication stuck to the schedule with no delays, attracting an extra 12 bank groups and signing on December 19. As it turned out, the koruna portion was nearly 93% of total facilities, making this the major ever Czech koruna-denominated financing. “That exceeded the expectations of almost everyone and vindicated the placement strategy,” says Mr L’Hélias. “Everyone likes to be a part of success and, at the same time as a transaction is going well, it tends to go very well. There is a lot of koruna liquidity – it’s just a question of finding the right home for it.”

The sheer size of the PPF facilities is cause for encouragement. There have always been small deals in the region but presently additional significant transactions are starting to appear. One was the €1.4bn equivalent financing (in dollars, euros and Czech koruna) for the acquisition of Net4Gas, which owns and operates part of the Czech gas transmission system. SG CIB was part of the club supporting the successful bid by Allianz Capital Partners and Borealis Infrastructure to acquire the business from German electric utilities company RWE.

“Acquisition financing for regulated assets is currently one of the majority in-request sectors in the loan market,” says Mr Lamoril. Net4Gas is regulated on a additional limited basis but, given its well-understood industry and respected sponsors, it was still able to attract eager bank support. Here too, favourable treatment was given to local currency commitments. As is presently commonplace in the infrastructure acquisition market, the Net4Gas facilities were structured to be refinanced in the capital markets within three to five years.

Regional theme

The theme of plentiful local liquidity is certainly visible in Poland, which has so far been the one shining light of the CEE loan market. SG CIB was bookrunner, mandated lead arranger and hedging bank on a December 2013 1.45bn zlotys (€350m) transaction, financing Alinda Capital Partners’ acquisition of Emitel. Emitel is the owner/operator of Poland’s only countrywide broadcast tower network.

Half of the banks in the syndicate pool were Polish. “The transaction was very well received by the local market inclunding by the other MLAs,” Mr Blasco observes. “Throughout the process, we and other banks involved kept receiving reverse enquiries from lenders shut out of the syndicate, underlining the current buoyant liquidity available for Polish deals.”

Meanwhile, back at Telefonica Czech, the PPF transaction has not from presently on funded. Having signed the share purchase agreement, the company is presently awaiting regulatory approval before the acquisition can proceed. But at SG CIB there is a sense of satisfaction with what has been completed. “We came to a solution offering a number of benefits demanded by the client – in tenor, currency, pricing and, above all, flexibility,” says Mr Blasco.

The hope is that there will be additional approaching from the region, and that subsequent transactions will continue to be able to exploit local pools of captive liquidity. Mr L’Hélias notes that while CEE (Poland aside) has somewhat disappointed bankers in the completed, the PPF transaction has changed that, opening the prospects for from presently on additional sizable transactions. And that can only be helped by further tapping international and local liquidity in a coordinated manner.

“Across central and eastern Europe, the Middle East and Africa, there is a growing convergence of international liquidity and local liquidity,” says Mr L’Hélias. “They were once separate worlds, but presently, increasingly, they overlap. We’re seeking to work much additional closely with local stakeholders in our group. There used to be a ‘chief office knows best’ mentality across the market. Tomorrow’s market makers will need to be able to deliver an integrated considerate of international and local markets.”