Europe leveraged loans and high yield drops in Q3

Leveraged loan and high yield issuance in Europe fell significantly in the third quarter of the year, reflecting in part the uncertainty in the capital markets and reducing liquidity, private equity advisor Marlborough Partners said in its latest mid-market quarterly report.

The low levels were also due to the traditionally quiet month of August and a scarcity of large deals, which underpinned the second quarter, such as Saga and Virgin Media.

Dividend recapitalisations in Europe reached a post-2007 high of €2.9 billion however. GPs have taken €2.3 billion of equity from their portfolio companies, equating to the whole of 2013’s figure, the firm said.

The busiest aspect of Marlborough’s work this year has been advising GPs on debt structures for IPO candidates, Romain Cattet, partner at the firm, said in a statement.

“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,” Cattet said.

Amongst the main terms and conditions, loans have been mostly non-amortising or non-repayment except for cash sweep. Only one or two financial covenants in the form of leverage or interest cover ratio are required. Rarely is a cash flow cover ratio included. Loans are mostly unsecured.

Volumes in the UK totalled €2 billion for Q3 2014, down roughly 50 percent from the volume experienced during the same period last year at €4 billion. In the second quarter of 2014, €8.3 billion in leveraged loans were issued, showing a steep fall between the quarters.

A similar trend was witnessed in Europe with total leveraged loan volume in Q3 2014 at €19.8 billion, of which €15.1 billion was for private equity companies, as opposed to €30.2 billion in Q2.

To the end of Q3 2014, 57 percent of private equity loans were used for acquisition, 18.2 percent for recapitalisations and 24.5 percent for refinancings. Average LBO leverage multiples across Europe plateaued at 5.0x.

Uncertainty in the capital markets drove increased risk aversion in the market, resulting in the iTraxx rising in the third quarter to first quarter levels and settling at 257 bps.

Cattet added: “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.”