Marlborough Partners, the independent private equity debt advisory firm, today published its report on the European leveraged finance market in Q2 2014.
The report, analysing data from a number of sources, shows continuing buoyancy in the debt markets, with average loan levels in European buyouts (primary as well as refinancings and recapitalisations) rising and equity contributions reaching their lowest levels since 2007. The large market saw significant movement towards covenant-lite structures and a rapid resurgence of second lien issuance, whilst the mid-market saw significant growth in all bullet structures.
Across Europe, where the total private equity loan volume in Q2 was €22.3bn, average senior and total leverage multiples reached 4.8x and 5.0x respectively (as against 4.4x and 4.7x in the whole of 2013). Average equity contributions were 43.6% but reached 42.0% in secondary buyouts, the lowest level since 2007.
In the UK, loan volumes totaled €8.3bn, a substantial increase from the €1.6bn recorded in Q1 and the €5.3bn in Q2 2013. This was driven in part by a small number of large issuances, including Saga and Virgin Media.
Although refinancings and recapitalisations represented a smaller share of European loan volumes in Q2 (for the first time since Q4 2012), down 27% from the same period in 2013, activity remained strong. H1 2014 has seen 66 refinancings and recapitalisations, as against 62 in H1 2013.
UK spreads continued their downward trend averaging 423bps in the second quarter, even lower than the first quarter’s 427 bps, and the lowest average seen since 2008. The iTraxx Europe Cross-Over index, a key indicator of market sentiment, continued to tighten in the quarter, settling at 235 bps.
As highlighted in Marlborough’s Q1 report, the European market is showing significant movement towards cov-lite structures. In the first half of 2014, US cov-lite issuance accounted for 62% of all institutional new issues. European cov-lite deals recorded a high of 14% of all outstanding loans now lacking maintenance covenants, compared with 6% at the end of 2013. Cov-lite issuance in Europe has now reached over €10bn, eclipsing 2007’s level of €8.1 bn.
In addition, the large market experienced a resurgence of second lien debt. Thirteen second lien facilities were issued this year up to July 14; there were none in 2013. Although these deals only account for 4% of total institutional loan volume, all were syndicated deals, providing optimal pricing for borrowers.
Marlborough Managing Partner, David Parker, said: “The interesting thing about the market at the moment is the blending of US and European terms in the large market which is creating increasingly favourable terms for borrowers. At the same time and given the evolution in the large market, some of this is filtering into the mid-market and this, combined with significant competition from debt funds, is resulting in sponsor-friendly terms for deals of all sizes.”