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Mezzanine market grows but senior debt retains popularity with sponsors

European mezzanine loan issuance increased 30 percent to €1.3 billion in 2012, although senior debt remained the instrument of choice for most types of private equity deals, according to research by investment bank Baird.   

Although buyout volumes in Europe remained subdued in 2012, purchase multiples rose to their highest level since 2008, according to research from investment bank Baird.

According to the report, LBO debt multiples rose slightly, with total leverage for larger €500 million to €1 billion deals at 4.9x, and smaller, sub-€250 million deals at 4.1x.  The report found senior leverage multiples for non-syndicated deals were up to 4x for very strong credits but were typically in the 3-3.5x range.  

Senior debt was the instrument of choice when building financing packages for European deal, Baird’s report found, although the mezzanine and high yield bond markets enjoyed significant growth.

All-senior deals accounted for 67 percent of the total; senior and mezzanine accounted for 11 percent; and senior and high yield, 22 percent.

Mezzanine issuance rose by 30 percent over the course of the year to reach €1.3 billion in total compared to 2011. Average yield was 10.9 percent, with an average multiple of 1.3x.

High yield issuance edged higher to a shade over €36 billion, but remained below 2010 €44 billion peak. High yield remained primarily a refinancing tool: 49 percent of high yield issuance was for that purpose, compared to 19 percent for acquisitions, and 9 percent for recapitalisations.

 “Lower buyout volumes have meant that while high quality transactions are completing, they are doing so with higher equity, implying growth and operational improvement will be necessary to drive returns,” Paul Bail, managing director at Baird, told Private Debt Investor. 

 While he said that purchase price multiples were higher, he said that only the best deals were being completed, with a number of deals being pulled because of reported buyer and seller expectations not being aligned.

 “In the mid market we saw relatively strong banking demand in the UK, Germany Netherlands and in the Nordics, with more challenging conditions for mid-market Italian deals,” he explained. “Recapitalisations are being seen far more frequently, and banks remain keen to lend to the better credits.

“The cost of debt fluctuated over the year – with pricing increasing in mid year but then reducing towards the end of the year,” he added. “Mezzanine has been steady, as has high yield which has definitely helped refinance current deals. There are a lot of private equity deals in the pipeline but like 2012, it is difficult to foresee whether these deals will actually be completed.”

“Private debt funds are growing in importance and will play a reasonable part in the smaller markets,” said Bail. “All the senior deal structures continue to dominate private equity led buyouts.”

Looking ahead, Bail said that 2013 will look a lot like 2012: “Overall, the outlook for 2013 appears to point to more of the same, with limited visible impetus for meaningful new deal volume growth.”