2016 has been marked by considerable volatility in global equity and bond markets amid concerns over China’s growth slowdown, the impact of sustained lower global oil prices and Brexit. As such, European banks and funds have become more cautious of certain cyclical and discretionary spending linked sectors with lenders tightening terms and reducing appetite.
The mood is borne out in recent figures1 which show that private debt fundraising over a rolling five-year period rose to €413bn this year, compared with €353bn in 2015 and €284bn in 2014. However, of this year’s figure €340bn was raised by North-American headquartered organisations compared with €73bn by those in Western Europe.
Yet European funds still have plenty of dry powder, especially to invest in the mid-market, while a record number of new funds have also been raised across the continent in the last 18 months.
The mid-market is still dominated by the banks, representing two thirds of all deal participations tracked in 20152, however there is an increasingly diverse mix of non-bank lenders active at both the lower (sub €20m bilateral debt) and upper (club/syndicated deals above €200m) ends of the market.
One of the biggest shifts in the market has been the increased penetration of the unitranche product by non-bank lenders. Ares, Alcentra, BlueBay and Permira Debt Managers are among the most active unitranche lenders, and unitranche facilities are expected to continue to play a key role in mid-cap leveraged buyouts as new players enter the market and incumbent funds raise ever larger funds.
1 Private Debt Investor
2 Alix Partners: Midmarket Debt Survey – 2015 (Europe)
Despite reduced activity in the syndicated loan market, appetite for private debt deals – from both banks and debt funds – remains very strong. Strong M&A activity in the mid-market continues to drive debt transactions, albeit some caution has been felt since Brexit.
We expect to continue to see new players enter the market, while various existing institutional lenders are in the process of raising new funds. High levels of liquidity in the debt markets continues to yield structures with high leverage, lower pricing and more flexibility on terms for strong credits.
The first quarter of 2016 saw half the number of transactions1 compared to the previous quarter. The majority of the deals were club financings as syndicated market conditions remained challenging.
Senior banks are increasingly participating in unitranche structures for mid-cap LBOs as debt funds become more prominent in the market. Competition in the mid-market remains high given the number of active players, so pressure on fees and margins is likely to remain. Meanwhile, there is evidence of the wider acceptance of unitranche structures in the market.
2015 was a strong year in France’s acquisition finance debt market as a result of a surge of alternative lenders providing financing from senior secured to mezzanine tranches. However, although alternative lenders are gaining market share, banks are still very active, thanks to low margined structures. On larger financings, debt providers have sometimes proposed very aggressive bullet covelight structures (similar to pre-crisis structures).
The market is still driven by the large Scandinavian banks delivering acquisition finance packages. However, PE groups have started to show interest in unitranche debt structures where bank and alternative non-bank lending is combined. UK non-bank debt providers are, together with a small number of Scandinavian players, showing interest in the less developed Scandinavian market and we expect to see growth here.
Although banks still provide more than 80% of debt financing to the corporate sector, it is expected that their market share will fall as a consequence of the capital requirements imposed by Basel III rules. Larger mid-size companies are starting to more frequently use capital markets for bonds issues, typically around ¤100m each issue, but smaller companies cannot enter this pool of finance and this has created an opportunity for direct lending funds, both domestic and foreign. Meanwhile pension, insurance and other institutional investors are now starting to allocate a small fraction of their liquidity to this asset category.
Reduced competition has prevailed in recent years stemming from the financial crisis, which has led to a credit gap in the Irish SME market. To fill this gap the government, through the Irish Strategic Investment Fund (ISIF), has provided direct funding to alternative lenders such as BlueBay Asset Management, the Strategic Banking Corporation of Ireland, BMS Finance and WLR Cardinal Mezzanine Fund. Swedish PE house Proventus and Pricoa Capital have also been active in the market. The invoice discounting market is competitive with players such as Aztec Finance, Bibby Financial Services and Credebt Exchange.
1 Altium European mid-cap monitor