The reopening of the loan market improves the prospects for the European risk capital pipeline
With the European leveraged loan market having reopened ahead of the Easter holidays, there is renewed optimism that the pipeline of private equity-backed mandatory deals will soon be syndicated. And with purchase price multiples falling at the end of the first quarter – alongside a slight decline in equity contributions from sponsors and increasing leverage – it is hoped that more deals will now be struck to maintain the pipeline well supplied for the rest of the year.
Despite tough markets due to lingering geopolitical risk, so far in 2022 (through April 15), debt funding for sponsored buyouts has reached 10.8 billion euros, according to LCD – which, although ‘less than 13.6 billion euros on the same measure in 2021, is even higher than any other comparable period since the beginning of 2007 (excluding 2021).
Following the reopening of the syndicated loan market, there have already been €3.3 billion in total leveraged loan issuance this month (until April 15), including €2.7 billion in leveraged loans. euros are sponsored, the whole of this offer supporting new redemptions. These recent syndication deals include the sustainability-linked term loan backing Brookfield’s takeover of European slate group cupathe term loan supporting Triton’s acquisition of a specialty pharmaceutical group and global provider of management services to healthcare-related industries Clinigeneand the large financing of the takeover of Veoneta pan-European group of eye clinics, by PAI and OTPP.
Seeing two new deals in April in the healthcare sector comes as no surprise, as deals in this segment have dominated recent activity, accounting for a 23.36% share of new sponsored deals in Q1 2022, with Services & Leasing and Computers & Electronics in second and third place respectively.
Zooming out to examine the rolling 12-month data to the end of the last quarter, total sponsored shows reached 91.7 billion euros as of March 31, down from record highs. end of 2021, when the total was €109.1 billion. . Indeed, 2021 ended with the highest sponsored volume and highest redemption volume since 2007.
Meanwhile, the total volume of buyout transactions in Europe (including sources of debt and equity financing) stood at 89.7 billion euros at the end of March. This tally is down from the record level seen at the end of 2021 of 102.6 billion euros, which was again the highest amount on this measure since 2007.
Sponsors have been able to fund deals with higher debt levels over the past 12 months, with multiples of total debt to EBITDA rising to 5.94x, from 5.82x on the same metric at the end of 2021. Again, this is the highest level since 2007.
At the same time, average equity checks (as a percentage of total sources) fell slightly to 45.8% over the past 12 months, from 46.6% at the end of 2021 and a 10-year peak of 51.6 % in 2020. Another funding trend for sponsors is the growing prevalence of bond issuance in their deals – by the end of the first quarter, bond-only-funded deals reached a 23.5% share transactions, which is the highest level since LCD started tracking this data.
The high yield bond market’s appetite for such takeover debt will soon be tested with the package of jumbo bonds and loans funding the takeover of the UK supermarket group Morrison by CD&R, which bankers are expecting as early as next week.
The financing will have a capital structure consisting of £5.6 billion of secured and unsecured debt, £1.3 billion of preferred shares and around £2 billion of ordinary shares, according to S&P Global Ratings. Of the debt, a £1.2 billion secured junior tranche was placed with the Canada Pension Plan Investment Board in February, with a coupon of 6.5% and an OID of around five points, according to sources.
The percentage share of these types of buyout deals – namely public-private deals – increased to 20% of deals in the first quarter of 2022, from 11% in 2021. This trend could accelerate if a deal materializes in from KKR. continuation of Telecom Italy (TIM). The deal was first mooted in 2021 and could value the telecoms company up to 33 billion euros including debt, easily ranking as the biggest takeover ever in Europe, even if KKR ends up paying a lower purchase price.
TIM has decided not to open its accounts at KKR, making a full takeover unlikely in the short term. However, the operator has left the door open for private equity involvement as it continues to investigate the separation of its network division. In the meantime, looking at the broader market, the share of spin-offs – such as trades observed for Science games lottery and ARMOR-IMAK — has risen so far this year from 23% to 30%, while the share of secondary buyouts and family/other buyouts has fallen. Meanwhile, P2P and corporate divestitures could be fueled by a rationalization of some of the exorbitant purchase price multiples the market has seen in 2020, with data tracked by LCD showing that these multiples have eased over the course of 2020. over the last 12 months to reach an average of 11.47x, compared to 12.34x at the end of 2020.
“We’re in limbo right now and there’s a disconnect between what private equity is willing to pay and what sellers are willing to accept,” says Jeremy Ghose, managing partner and CEO of Investcorp Credit Management. “Will this last forever? No – the dry powder wall that private equity sits on is still at one of its highest levels. When you have that wall of money, it usually finds a home eventually.
TIM isn’t the only telecom deal being discussed either, with a potential €6 billion debt increase that could follow the sponsorship. MasMovilare partnering with Orange’s Spanish operations, according to reports. The duo said they were in talks to form an equal joint venture on March 8, in a deal valued at 19.6 billion euros. There is also potential for withdrawal from the tender for the London-listed educational publisher Person. The company said it rejected two offers from Apollo, the most recent of which valued the group at 854.2p per share, against an initial approach of 800p. The latest bid would value the group at £6.5billion and would represent the biggest sponsor-backed privatization of a European company since Morrisons last year.
Note of Caution
That said, bankers warn that volatile and uncertain markets have brought signs of reluctance from buyers, which is slowing or even halting some situations. In the wider corporate world at the beginning of the month, for example, based in the UK Spectrum backed out of talks to acquire smaller precision equipment maker Oxford Instruments, blaming uncertainty stemming from the crisis in Ukraine. The deal was to value the target at £1.8billion.
The sources agree, noting that there are signs of a disconnect in valuations for buyers and sellers, which means the year could see a slowdown in secondary buybacks. It could also limit exit opportunities given that the IPO market remains shallow, despite the rally in stocks after the invasion. “Private equity doesn’t sell because it’s not happy with valuations,” one underwriter said.
Bain and CVC, for their part, opted against an offer for Boots before the deadline for the first round of the auction by British chemical chain Walgreens, according to reports first published on Sky News. Bidders including Apollo and the owners of UK supermarket group ASDA – namely the Issa brothers and TDR – remain in the process.