Q3 2014 Market Update

Marlborough Partners, the independent private equity debt advisory firm, today published its report on the European leveraged finance market in Q3 2014.

 The report, analysing data from a number of sources, shows leverage levels and high yield issuance down on Q2. This was partly due to the traditionally quiet month of August and scarcity of large deals which underpinned the large volumes experienced in Q2 (Saga and Virgin Media). It was also due to uncertainty in the capital markets and reducing liquidity, which saw a number of transactions either postponed or flexed to clear.

In Europe, the total leveraged loan volume in Q3 was €19.8bn (of which, €15.1bn were for private equity-backed companies) , as opposed to €30.2bn in Q2; in the UK the total was down to €2bn from €8.3bn in Q2. Average LBO leverage multiples across Europe plateaued at 5.0x.

Dividend recapitalisations in Europe reached a post-2007 high of €2.9bn. To September 30th this year, GPs have taken €2.3bn of equity from their portfolio companies, equating to the whole of 2013’s figure. To the end of Q3, 57% of private equity loans were used for acquisition, 18.2% for recapitalisations and 24.5% for refinancings (with a tiny percentage for ‘others’).

Uncertainty in the capital markets drove increased risk aversion in the market, resulting in the iTraxx fluctuating between 224bps and 300 bps over the quarter, settling at 257bps, 22 bps higher than at the end of Q2.

Marlborough Partner, Romain Cattet, said: “One aspect of our work during this very busy year has been advising GPs on the debt structures for IPO candidates. Apart from the last few weeks, European equity markets have welcomed a large number of private equity IPOs, providing a credible exit option for GPs. However, public markets have a relative aversion to high levels of debt, requiring sponsors to reduce the leverage in IPO candidates, typically to 2.0x-3.0x. At these levels, the restrictions associated with LBO facilities are not appropriate and we recommend replacing them with cheaper and more flexible corporate loans.

We have listed the main terms and conditions of such facilities in order to illustrate the main differences, as shown in the attached slide. While the IPO markets are currently in a waiting mode, we expect new listings to resume at the start of 2015 – perhaps to the frustration of buy-side advisers in dual track processes!”

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