Archive for February, 2015

Q2 2014 Market Update

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.”

Q1 2014 Market Update

Marlborough Partners, the independent private equity debt advisory firm, today published its report on the European leveraged finance market in Q1 2014.

The report, analysing data from a number of sources, shows that while UK leveraged loan volumes fell in Q1, to €1.6bn from €1.8bn in the previous quarter and €2.7bn same period last year, leverage levels in deals continued to rise. The average total leverage in UK private equity deals concluded in Q1 reached 5.2x compared with 4.8x in the previous quarter. Across the European mid-market (deals with debt below €250m), the average total leverage in Q1 edged up only slightly to 4.5x from 4.4x in the whole year 2013.

Refinancings and recapitalisations continued to drive European volumes.  Refinancings accounted for 44% of Q1’s €8.5bn sponsor-backed loans, a record high, up from 32% in the full year 2013.  Dividend recapitalisations accounted for 15% of the total, up slightly on 14% in the year 2013.   Cross-border financing activity reached a record high of €20.7bn both within Europe and between the US and Europe.

Covenant-lite issuance in Europe from US investors in Q1 stood at 25% of institutional loan volumes (as opposed to 60% in the US).  Margin compression has encouraged US investors to look to Europe for enhanced yields, but European market data suggests that the relative value gap is now narrowing.  True covenant-lite loan issuance from European investors remains virtually non-existent.

UK spreads continued to fall in the first quarter of 2014 averaging 427 bps on institutional loans, 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 290 bps, in line with the end of 2013.

European high-yield volumes reached €19bn in Q1 2014, the second busiest quarter on record, with double-B rated transactions accounted for the bulk of the total, at 52% a post-crunch high. However, single B issuance and sponsor-backed issuance both declined compared with Q4 2013, down by 25% and 49% respectively.

Marlborough Managing Partner, William Allen, comments: “The reduction in single B and sponsor-backed high yield issuance in the quarter was due to GPs being able to exit some investments through the public markets and, for mergers and acquisitions, opting for bank debt, given lower pricing and less restrictive pre-payment penalties.”

“If the gap between European and US yields is disappearing, we anticipate this will reduce US investor flows into European covenant-lite issues. Extremely long settlement periods on European loan trades and comprehensive transfer restrictions are also playing a part in dampening US liquidity. The market waits to see how this is going to play out.”

Q4 2013 Market Update

Marlborough Partners, the independent private equity debt advisory firm, today published its report on the leveraged finance market in Q4 2013 and an ‘end of term report’ on the full year for European leveraged loans and high yield bonds.

The report, analysing data from a number of sources, shows that UK leveraged loan volumes fell in Q4 to €1.8bn (€4bn in Q3), but that leverage levels spiked in the quarter taking average total leverage on UK deals to 4.8x for 2013, up from 4.5x for of the preceding nine months.

The iTraxx Europe Cross-Over index, a key indicator of market sentiment, continued to tighten in the quarter, falling below 300 bps, down from over 500bps at the end of Q2.

2013 was the strongest year since 2007, with €67bn of senior leveraged loans issued in Western Europe, up from €29bn in 2012. This was largely driven by a significant increase in German volumes, which accounted for 36% of the total, with the UK at 24% and France at 12%.  The UK’s total of €13.7bn in 2013 was the highest since 2008, though still well below that of 2007’s €39bn.

2013 also saw a surge in Euro-US cross border activity at €47bn in the year, compared with €29bn for 2012; the majority of the total (€34bn) was syndicated in the US.

CLO issuance finally took off in 2013 driven by declining AAA paper costs (thus reducing liability funding and enhancing returns on equity).  From zero in 2012, 2013 saw €7.4bn raised from 20 vehicles.  This, together with loan repayments rising, as a result of more portfolio companies being sold and increased demand from non-CLO institutions, has boosted capacity in an already liquid and increasingly competitive market.

Marlborough Managing Partner, Jonathan Guise, comments: “Through leveraged loans and high yield bonds, sponsors paid themselves over €6bn in dividends in 2013, more than twice the amount paid over the 2008-2012 period.  This has attracted some negative commentary, but a sense of perspective is important.  Whilst there were a few eye-catching exceptions, the average dividend recap in 2013 paid 42.5% of the initial equity contribution three years after the original buyout.  Most of these portfolio companies have weathered one of the toughest trading environments for many years, so should be in good shape.”

On the back of a yield-hungry investor base and a period of improving macroeconomic stability, European high yield bond issuance reached record levels in 2013, with total issuance of €70.4bn, significantly outstripping 2010’s previous record of €44.4bn.  Of this total, nearly €26bn was issued for private equity backed deals, including €6.4bn for 13 leveraged buyouts.

Investor appetite for smaller deals strengthened, making high yield more accessible to the private equity mid-market.  In 2013 there were 27 deals of below €200m, of which 10 were below €150m.

The year also saw a steady decline in yields, falling to record levels in Q4 of 7.17% for B rated bonds and 4.34% for BBs.

Another key mid-market trend witnessed in 2013 was a rise in the number of Unitranche financings to 24 from 9 in 2012, reflecting a growing understanding and acceptance of the product amongst European sponsors alongside reducing Unitranche pricing, due to increased competition from providers.

Jonathan Guise concludes:  “We expect to see downward fee and margin pressure on both bank debt and Unitranche continuing into at least early / mid 2014.  We also anticipate banks being increasingly prepared to underwrite mid-market deals and to increase their hold levels to combat declining loan books.

“The extent to which European borrowers look for US financings this year will depend on the relative competitiveness of European investors, which appear to be settling into a covenant-loose world for large deals.  To date ‘cov-lite’ loans have only been accepted on a cross border basis, but it is just a matter of time before we see a fully European ‘cov-lite’ syndication.”

Q3 2013 Market Update

Marlborough Partners, the independent leveraged debt advisory firm, today published its report on the leveraged finance market for private equity primary transactions and portfolio company refinancings in Q3 2013.

The quarterly snapshot, analysing data from a number of sources shows that, whereas across Europe as a whole loan volumes fell to €14.5bn from €24bn in Q2 (largely due to the August slowdown in many continental countries), in the UK alone, loan volumes remained healthy at €4.5bn, similar to the €4.7bn in Q2 and significantly above the €1.2bn in Q3 2012.  In the first three quarters, loan volumes for UK deals were €11.9bn, compared with €5.5bn in the same period last year.

Despite the summer blip, market conditions for LBOs across Europe remained buoyant, with average senior and total leverage levels reaching 4.4x and 4.7x respectively. Average equity contributions fell to 41.7%, the lowest level since 2007.

Dividend recapitalisation loan volumes for the year to September 30th reached a higher level than at any time since 2007 at €3.3bn, with a further €4.6bn raised through bonds, resulting in €5.3bn of dividends being paid out to GP-managed funds.  This resulted in GPs being able to return 46% of the original equity input to investments an average of 3.4 years after those investments were made.

Refinancings and dividend recapitalisation loan volumes accounted for 49% of European private equity loans in the year to September 30th, as opposed to 46% for primary investments. This is the first time the European leverage loan market has seen this and highlights the lack of primary deal flow witnessed in Europe year-to-date.

The iTraxx Europe Cross-Over index, a key indicator of pricing expectations for sub-investment grade risk, steadily tightened to under 400bps having been at over 500bps at the end of Q2. European high yield issuance continued its upward movement, reaching €54.9bn in the year to date, which is a record figure for the first nine months of a year.

The report also looks at US-European cross-border lending, which has risen to €19.2bn in the year to September 30th, compared with €6.5bn for the whole of 2012.

These transactions are becoming increasing prominent in larger European private equity deals, with GPs taking advantage of more borrower-friendly terms in the US, a breadth of available liquidity and better pricing.   Leverage-equity ratios on US financing are also attractive, with the average leverage for cross-border deals in the year to September 30th standing at 5.2x and average equity contribution at 30%, compared with averages of 4.7x and 42% respectively for European-financed buyouts. Cov-lite loans are more typical in US financings; most US-Europe cross-border LBOs to date this year have been structured in this way.

In Marlborough’s view, successful financing from the US for European deals is dependent on those deals being large enough to be financially liquid both sides of the Atlantic, with – in most cases – the company being financed generating a proportion of its revenues in the US.  Furthermore, the financing raised should ideally mirror the currencies of the company’s cash flow, thus avoiding expensive foreign exchange issues.

Marlborough Partner, Markus Ehrler, comments: “This quarter shows two related trends: a continuing increase in dividend recapitalisations and competitive pressure from US sources of capital on European lenders.

“Although dividend recapitalisations attracted negative publicity in the run up to the financial crisis, most of the companies now recapitalising have survived the most difficult three or four years that many have ever experienced and will therefore be pretty robust businesses, capable of servicing higher levels of debt.  Furthermore, average debt-equity ratios, while creeping up, are still nowhere near the average ratio seen at the top of the market in 2007 of 66%/34%.  Nevertheless, it is important for all of us to keep an eye on the sustainability of this model.

“The US financing market is attracting many European issuers and we expect more companies of appropriate size to follow, despite the current political tensions within the US.  One possible consequence of this competition may be European lenders entertaining looser covenants – something that will delight many GPs.”

Marlborough’s recent transactions include the refinancing of Exponent-owned Trainline and Equistone’s acquisition of Whitworths.

Marlborough Partners Expands Team to Eleven and Moves to Larger Offices

Marlborough Partners, the independent leveraged debt advisory firm, has added two new members to its team.  Taddeo Vender has joined as Associate Director and David Schulte as Analyst, bringing the team to eleven.  This follows the recent appointment of Markus Ehrler as Partner to lead Marlborough’s new office in Frankfurt.

Taddeo Vender previously worked in KKR’s Capital Markets team, sourcing leverage and advising on capital structures for private equity investments, company refinancings and exits across Europe, raising more than €3bn in loans, high yield bonds and equity capital.  Transactions in which he was involved include the acquisition financing for UK subsea services provider, Acteon; the high yield financing for German forklift manufacturer KION; and the super senior revolving credit facility ‘upsize’ for the Spanish aviation services company, Inaer.  Earlier in his career, Taddeo worked at Credit Suisse in the Leveraged Finance Origination team, covering financial sponsors.

David Schulte previously worked, after internships at DZ Bank and Doughty Hanson while taking his degree and MSc, as an analyst in Macquarie’s debt advisory and leveraged finance team in London, advising and providing debt capital to corporates and to financial sponsor-backed transactions.

To accommodate its expansion, Marlborough Partners has recently moved to larger offices in The Prow, just off Glasshouse Street, W1.