In the largest UK acquisition since the country's vote to leave the EU on June 23, British investment firm Melrose Industries announced it will buy US firm Nortek for an enterprise value of $2.81bn last week.
The deal was announced six days after the UK’s Brexit vote and in the midst of Europe-wide financial upheaval. Meanwhile, four banks were finalising plans to underwrite the $1.25bn loan for Melrose’s acquisition — Bank of America Merrill Lynch, HSBC, JP Morgan and Lloyds.
Ostensibly, the deal looks like a win for UK loans given the Brexit chaos, showing that there is appetite to underwrite a loan for an ambitious acquisition by UK firm of a US company, while sterling slumps.
But Melrose is not just any borrower. The firm specialises in acquiring and improving manufacturing businesses, and is very popular with its lenders.
In 2013, the investment firm bought Germany’s Elster Group for £1.8bn, and this year sold the firm for £3.3bn, paying out £2.4bn in cash to shareholders.
“Melrose is particularly special,” said a banker from one of Melrose’s relationship banks. “It has a long track record and a lot of bank support.”
Melrose has 11 relationship banks which have gave the firm a $2.5bn credit line in 2014, maturing in 2019.
Barclays, Commerzbank, HSBC, JP Morgan, Lloyds, Mizuho, RBC Capital Markets, RBS, Santander, UniCredit and Wells Fargo Securities are mandated lead arrangers.
UK loans for strong credits were always likely to sail through the Brexit aftermath with support from relationship banks, given that the loan market sticks close to its favourite clients. The scrutiny instead should be focused further down the credit spectrum to the leveraged sector, where the referendum is having an impact.
Last week, Exterion Media, the UK advertisement operator, pulled £220m of loans because of lack of demand from investors. Part of the deal was assigned to pay a dividend to Exterion’s owner, Platinum Equity.
There was not enough interest for a dividend repayment from a business with its core sales in the UK, according to a source close to the deal. Up to 59% of Exterion's revenue in 2015 came from the UK.
This doesn't mean the market is entirely closed — last Friday, packaging firm Linpac closed €115m of senior secured loans at the same price at which the debt was originally marketed — but Exterion's withdrawal is hardly a sign of strength.
Melrose, meanwhile, is a special case. It's a win for the borrower, but doesn't prove that UK loans are ready to shrug off Brexit.