European private equity sponsors have increasingly turned to the leveraged loan market for M&A financing this year, according to data released by S&P Capital IQ Leveraged Commentary and Data.
A surge in European high yield bond issuance in 2013 prompted many sponsors to use bonds paired with revolving credit facilities to support M&A transactions. 14 percent of M&A financings were completed with bonds and revolving credit facilities, which led to a four year low (59 percent) in the percentage of financings completed via term loans.
The trend appears to have reversed course through the first quarter of 2014. Through 12 March, 77 percent of European M&A deals tracked by S&P Capital IQ LCD were financed by term loans. A bond-plus-revolving credit facility financing had not been completed as of that date.
“Sponsors have traditionally preferred loans over bonds, because they can be repaid more easily,” said S&P Capital IQ LCD associate Ruth McGavin in a statement. “This natural preference is re-emerging, and will be aided by investors’ willingness to buy covenant-lite loans in Europe.”
That re-emergence has also been supported by an acceptance of covenant-lite loans within the investor community, products that began to emerge in cross-border transactions between the US and Europe. Through 12 March, approximately €2 billion of covenant-lite loans had been sold in Europe, which puts sales roughly on pace to match the €8 billion sold last year.
While there has yet to be a pure sale of cov-lite loans in Europe, S&P also reported that “investors’ hunger for assets is encouraging them to take a more tolerant stance towards this type of loan. On this basis, leveraged companies with strong credit profiles could tap the domestic market without maintenance covenants during the course of the year”.