BCA, which generates the majority of its income from the UK market, is raising a £500m seven-year Term Loan B and a £472m-equivalent seven-year euro-denominated Term Loan B as part of the financing backing its £1.91bn acquisition by private equity firm TDR Capital. It also includes a £265m eight-year second-lien facility, which has been pre-placed.
The deal is being closely monitored because it comes at a time when the uncertainty surrounding Brexit is mounting.
“There is obviously additional scrutiny for UK deals now, especially with the development of Brexit handled by Boris Johnson,” said an investor.
UK Prime Minister Johnson has promised to leave the European Union on October 31 even without an agreement, but his no-deal Brexit attempt was blocked by British lawmakers this week.
As a tried and tested name in the European leveraged market, BCA could well ease some fears among loan investors. The company had a history of private equity ownership prior to being taken public in 2015.
“Everybody knows BCA quite well, it’s a popular name ... That would make them more comfortable,” a banker said.
In addition, some investors believe BCA could benefit from an economic downturn as consumers prefer to buy used cars rather than new vehicles.
BCA, the owner of webuyanycar.com, purchases used vehicles and disposes of them through auctions. The company recorded a 7.8% increase in adjusted Ebitda to £171.9m for the 2019 fiscal year ending in March - 64% of it generated from UK vehicle sales.
To increase the likelihood of success, the deal is structured with a mix of euro and sterling tranches rather than as a purely sterling deal.
As the UK spins towards an election and Brexit remains up in the air, investors have become more wary about holding sterling loans, especially as the currency has been increasingly volatile.
“Why would you take that risk on sterling now?” asked a loans banker who has chosen not to handle any UK-based deals.
Sterling hit its lowest level against the US dollar since a flash crash in October 2016 on Tuesday, but rebounded after parliament blocked a no-deal Brexit. Sterling has dropped around 5% since May.
Loan investors interested in buying the sterling tranche are likely to be managed accounts, funds and a few CLOs with sterling capacity, while euro-based CLOs tend to avoid investing in sterling loans because it involves hedging costs.
“You need to hedge it, and it becomes a question whether the premium is enough to cover the hedging cost,” a second investor said. “We need a decent pricing to do a sterling deal.”
Investors believe the sterling loan needs to carry a margin premium of 75bp-100bp over the euro tranche to draw demand. Pricing will be released at a bank meeting on Tuesday.
Bank of America Merrill Lynch, HSBC and Royal Bank of Canada are the physical global coordinators, while KKR Capital Markets, Santander and SMBC are passive joint bookrunners. HSBC is the agent.
If BCA receives warm market reception, it may bode well for the upcoming deals as BCA is the one with the highest UK exposure among a series of announced UK-based public-to-private deals.
The line-up of UK deals includes £3.8bn-equivalent of loans backing an acquisition of UK theme park operator Merlin Entertainments, which generated 31% of revenue last year.
Others are Advent’s £4bn buyout of UK defence and aerospace group Cobham and US$3.4bn acquisition of British satellite company Inmarsat. Cobham had 8% UK revenue, while Inmarsat generated just less than 5%, according to their 2018 annual reports.
“They would just do it via euros and dollars. Why would you do it in sterling if your UK exposure is so little,” the first investor said.
(Editing by Christopher Mangham)
By Prudence Ho