Half of German mid-market deals funded by debt funds – report

Debt funds have been rising in prominence in German mid-market debt since their first appearance in 2013.

Half of all German mid-market debt deals in 2018 have involved debt funds, according to research by debt advisory firm GCA Altium.

In its Q3 2018 MidCapMonitor report, GCA Altium said that while the overall German market was weakening, debt funds are accounting for an ever-larger share of the market and this year have been responsible for one in two deals.

In the first three quarters of 2018, debt fund unitranche financings have accounted for 52 percent of German mid-cap deals, with 34 deals completed by funds compared to just 31 by banks. This is up from 34 percent of deals in 2017 and 15.6 percent in 2016.

GCA Altium said: “In addition to debt funds being able to lower the cost of unitranches through first-out / second-out structures, we have observed that for very strong credits, covenant lite unitranches have recently been offered and executed, although costing a premium.”

The firm expects overall deal volume in Germany to be lower than in 2017, when 103 deals were completed. At the end of Q3 2018, deal volume stood at 65, and GCA Altium believes the current deal pipeline is unlikely to raise this above last year’s total.

Notably, the third quarter of 2018 was the weakest by deal count for several years, the firm said, with only seven senior bank financings. Term debt volume decreased in line with this to €550 million, down from €950 million in Q2 2018. GCA Altium recorded no second lien financing structures in mid-cap LBOs in the third quarter.