Thinking positively has been replaced by a real optimism about 2014, underpinned by an increase in deal flow, liquidity and new entrants. The mood on a panel this morning discussing the results from the latest DLA Piper’s European Acquisition Finance Debt Report for 2014 was one of cautious optimism.
Chaired by Alexander Griffith, Partner at DLA Piper, the panel began by highlighting the emergence of unitranche financing over the last eighteen months. “Terms seem to be moving towards the borrowers,” Griffiths said. Controls are becoming more relaxed with covenant light and covenant loose loan structures, he added. However, “New money deals remain far and few between,” as refinancing takes up the majority of deal activity, he said.
Philip Butler, DLA Piper’s UK head of finance, echoed the good news story coming out of the report, but backed up Griffith’s caveat about refinancing. “One concern that leaps out is the extent to which activity is underpinned by refinancing instead of new deals.”
250 debt providers, advisors, sponsors and corporates active in the European debt markets took part in the DLA survey. The report found 70 percent of respondents expected deal activity to increase in 2014, up from 50 percent in last year’s survey. 71 percent of lenders expected their acquisition finance lending to increase in 2014, but did not view the presence of alternative lenders as a long-term given. Respondents also expected more aggressive pricing and leverage.
Fenton Burgin, partner at Deloitte Debt Advisory, said the increase in debt funds actively targeting the mid-market environment was the “knock-on” effect of an increase in liquidity, and believed the trend would continue. It also reflects the resilience in mezzanine lending during a downturn, he said.
Burgin believes debt funds are definitely here to stay. “We are in a transition phase” he said, with the European market moving toward the US mode. “The market is finding its feet and it will definitely continue to evolve more in the next 12-18 months.”
Max Mitchell, fund manager and head of direct lending at ICG, said he believed the changing climate would be more favourable towards banks. Whilst he didn’t think alternative lenders would replace banks in Europe to the extent they have done in the US, he did predict more partnerships between traditional and non-traditional lenders emerging.