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The European leveraged loan market, in the doldrums for nearly two years, is set for further growth in the second half as risk appetite returns to help private equity sponsors and trade buyers fund several large buyouts.
Buyout deals for UK car parts maker Tomkins, frozen food maker Findus Italy, Belgian nappy maker Ontex and French frozen food group Picard Surgeles were all agreed over the past month, and will boost issuance in a market which saw barely any sizeable deals after the collapse of Lehman Brothers in 2008.
In addition to the more positive market tone, leveraged loan bankers said that European commercial banks appear increasingly eager to return to the leveraged loan market.
"Small German banks are coming back again, as are the Scandies and Benelux, and the Spanish banks are making noises that they want to come back," a trader said. "We think they're taking up the slack from the lack of CLO issuance."
The return of smaller commercial banks to the market will also support issuance, but this could prove a delicate dance as three-month euro LIBOR, a gauge of banks' willingness to lend euros to each other, touched one-year highs of 0.896 on Wednesday.
"In Europe there is capacity for 500-600 mln euros, but you need to make sure it works for both banks and funds," a leveraged banker said. "For larger deals, you need access to different markets like the U.S., or you need to tap senior bank debt and the high yield market."
INVESTORS COFFERS FULL
Europe's loan market also got a boost from improving technical factors in July, with Thomson Reuters LPC data showing secondary loan market prices took on 80 basis points to 89.4% of face value as concerns over euro zone banks eased.
Investors are pleased with the string of upcoming new deals, eager to lock in returns and diversify their existing portfolio after the recent loan issuance hiatus.
Their coffers are well stocked after the repayments stemming from Dutch cable operator Ziggo's 1.2 bln euro high yield bond in May, while there has been a trickle of money from the amortising term loan A tranches of 2006-2007 vintage deals, bankers said.
"Investors know when they get a repayment and there are term loan As that continue to amortise, so they will be setting funds aside for September to see what's on the sale rack," a senior leveraged loan banker said.
This positive technical picture has seen banks turn increasingly aggressive in the bid for mandates, bankers said, most of which will support secondary buyouts with an already existing lending base.
Secondary buyouts make up 68% of the total $6.4 bln of European buyout-related leveraged loan issuance so far this year, compared to 31% out of $9.6 bln last year, according to Thomson Reuters LPC data.
"The new deals coming out are not as good as people claim, they are being stretched by the banks falling over each other to do business — there is currently a supply-demand imbalance," an investor said.
To succeed, market players expect to see deals conforming to standards including pricing in the 450-500 bps region, maturities of between six and seven years, assigned ratings for larger operations, leverage not in excess of six times multiple including subordinated debt, and LIBOR floors.
LIBOR floors, characteristic of US leveraged loan market after the credit crunch, crossed over into Europe at the end of 2009 as a cheaper alternative to higher margins for lenders eager to maximise yields.
