What’s your take on the loan markets in Europe at the moment?
The challenge is that banks have come under increased regulatory pressure, particularly from Basel III, to shore up their capital base, and that tends to make them more risk averse. State ownership of some has tended to give them a more parochial focus on their core geographies too. Those are things that can cause banks to be more selective in how they want to allocate capital to leveraged loans.
How about the institutional side of the market?
The institutional loan market in Europe has historically been a mixture of CLOs and other types of credit funds, and experienced dramatic growth between 2002 and 2007. A lot of that growth was driven by CLO formation and many of those CLOs are getting to the end of their reinvestment periods. There are now real questions about the future evolution of that part of the market. It’s difficult to make the arbitrage work. Then there’s the so-called ‘Skin-in-the-game’ Directive, which means originators have to retain equity in the vehicle. That’s made it harder for managers.
So far, so gloomy. Is it all bad news?
Not at all – there are lots of mitigants. I think there is still appetite for debt invested in European leveraged credits, it’s just a question of finding the right way to structure it. And the banks are still there – there’s probably 20 to 25 commercial banks who do still view leveraged lending as a core activity on the senior secured side. When I look at all the deals we’ve done post-crisis, there’s been a bank component on nearly all of them.
What about the pricing of debt?
It obviously varies depending on the credit, but generally speaking, typical pricing for a bank component of a new buyout is in the region of 4.5-5 percent over LIBOR, with some upfront fees on top to enhance the yield. Before the financial crisis, that was probably 2-3 percent over LIBOR. So it appears there’s been a structural increase in what banks charge. But from our perspective, base rates are so much lower than they were, it cancels out that pricing inflation. That means the all-in cost of senior secured debt is very comparable to the average over the last 15 years.
The high yield bond market has been pretty spectacular in Europe though, hasn’t it?
High yield bonds are the big success story in Europe. We’ve seen record volumes over the last three years. A lot of that is refinancing existing debt, but it’s absolutely available for new large buyouts too and it’s a very attractive tool. We’ve used high yield successfully for both Ziggo and Numéricable. Because it’s such a deep and liquid market, it’s quite possible to contemplate €1-2 billion financings in the bond market. The limiting factor is being able to find the right buyouts to do in the first place.
Can you give us a flavour of the financing tools you’ve used to back some of your recent deals?
For CPA Global, we used a combination of senior and mezzanine. The senior had a bank component and an institutional component. It was underwritten by six banks. After aggregating their final hold, we were more than halfway to achieving a successful syndication. In the end, we attracted more than 25 other lenders for the syndication, which was a good indication of demand. We placed the mezz ourselves with three specialist mezzanine funds. That saved us an underwriting fee!
What’s your overall prognosis then?
For larger, good quality companies, and particularly for sponsors who have good relationships, experience and expertise in dealing with the capital markets, there is a market to work with that can produce attractive financing. n
Matthew Sabben-Clare is a partner and member of Cinven’s financing team. He joined the firm in 2005 from Merrill Lynch.