Making the most of an opportunity

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Attending EVCA’s Annual Symposium in Rome, uncertainty is one of the themes to conversations among delegates. News from the US have not been good for some time now, and it is far from clear how this will ultimately influence matters in Europe. Some attendees seem pessimistic.

But the optimists are here as well, among them Royal Bank of Scotland’s Eric Mallaroni and Fabio Sangiovanni, whose outlook on the European leveraged finance scene remains noticeably positive.

Paris-based Mallaroni says he and his colleagues are alive to the fact that there is concern in the market place. But he certainly does not expect a credit crunch and is convinced that deals, including the large ones, will continue to get done.

The fundamentals in continental Europe are still strong, he says, and the Euro will to some extent offset whatever negative influence may come across from the US. Moreover shareholder value is a philosophy that many Europeans are only just beginning to embrace, and it too will continue to drive deal flow.

Sangiovanni, who’s come to Rome from RBS’ Milan office, believes Italy is one market place where this analysis definitely holds true. “There is still a lot of unexpressed potential in the market” he says, particularly among medium to large-sized family businesses looking to internationalise their operations.

What’s missing is what Sangiovanni describes as a more disciplined legal and tax-friendly environment to allow more deals to come to fruition. Whilst the structural framework has improved, there are still many regulatory obstacles, making it “cumbersome enough to at least discourage a few players.” Despite such impediments however, Italy is going to get busier, and competition will be getting tougher he predicts .

So for RBS, top of the European leveraged buy out league tables last year, there should be plenty of business round the corner. But, even if the outlook was worse, the bank is clearly not planning to throw in the towel in a hurry.

'We are, and will continue to be, providing debt to this market”, Mallaroni asserts. He argues that an important difference between RBS and other banks is that it tends to be visible in the marketplace regardless of whether times are good or bad.

Caution is nevertheless imperative, particularly in the LBO market where equity sponsors are itching to put large amounts of cash into deals. “All this money raised is still looking to be invested, and we as debt providers have to be very careful to help private equity investors not to overpay on deals.”

Caution requires that deals must be done with revised cashflow projections for next year in mind. Mallaroni says that to apply the right discipline does not mean that gearing multiples will necessarily go down in future. They may well remain at current levels but will refer to the reduced EBIT and EBITDA forecasts for 2001/02 rather than past earnings.

Banks taking this seriously will be able to carry on lending, and Sangiovanni and Mallaroni look determined to grab a large piece of the action. This may require some flexibility and innovation though.

In order to service transactions at the top end of the market, few will get around syndicating deals. As the banking sector consolidates further, reducing the number of players one can syndicate with, alternative sources of cash, such as institutional investors, are becoming more important. The bank is therefore working on its first CDO, which Mallaroni says will launch within weeks.

This foray into collateralised debt seems further evidence as to why RBS ' leveraged finance team are set on playing a major role in a host of deals across Europe. Although the pessimist is never disappointed it takes an optimist to make the most of an opportunity.