(Reuters) – The level of debt that private equity firms are putting on large European buyouts has hit a five-year high and is at its highest point since the peak of the market in early 2008 before Lehman Brothers‘ collapse, according to Thomson Reuters LPC data.
Increasingly aggressive financings on large buyouts is expected to continue until the end of the year as banks compete aggressively for mandates and cash-rich investors are eager to buy loans after low M&A activity this year.
The recent wobble in the high-yield bond market in June and July due to fears of a slowdown in the US Federal Reserve Bank’s Quantative Easing programme has done little to cool the European leveraged loan market.
Buyout loans for German publisher Springer Science+Business Media and German ceramics company CeramTec both had total leverage ratios of seven times and were caught in the volatility as sentiment changed.
Springer’s loan was placed after revisions to attract investors but Ceramtec’s loan was successfully sold.
“Springer and CeramTec were both done with high levels of leverage but the banks got rid of them. Unfortunately this is sending the message that you can get away with high leverage. This sets the scene for an interesting third and fourth quarter,” a syndicate head said.
Total leverage ratios averaged 5.75 times on large private equity buyouts with loans of more than 500 million euros ($668.73 million) in the second quarter, according to Thomson Reuters LPC data.
This is the highest total leverage ratio since 6.08 times in the first quarter of 2008.
Highly-liquid loan investors have been trying to put cash to work, amid a deal shortage. European high-yield bond investors have also been looking at leveraged loans, along with US investors and global funds, and are more comfortable with higher leverage multiples on strong businesses.
Liquidity is also growing in Europe, as loan investors received repayments from bond refinancings, Collateralised Loan Obligation (CLO) funds putting cash to work before they are unable to invest as well as a range of new funds and CLOs.
The number of leveraged buyouts from January to July was 35 percent down at 37 deals compared with 57 deals in the same period last year.
“As a result of the supply and demand imbalance and a massive appetite for new deals it has been a good opportunity for sponsors to push up leverage multiples close to where they were in 2007 or in some instances even beyond that,” a leveraged finance partner at a law firm said.
Total leverage multiples have risen sharply from 4.25 times in the fourth quarter of 2012 as private equity firms have taken advantage of excess demand to secure more aggressive terms.
“The bond market and US liquidity, coupled with a load of leveraged loan repayments and a lack of new deals, mean that investors are accepting more aggressive leverage multiples than expected on European loans,” the lawyer said.
Leverage multiples are also rising as a result of the European market’s adoption of US structures which allow companies to reduce amortising debt and increase their cashflow.
The market is making a clear distinction between larger buyout financings of more than 500 million euros with aggressive leverage multiples, and smaller European deals with e lower leverage of around four times.
The smaller middle market deals rely more on bank lenders while global and US funds are attracted to bigger, more liquid, loans.
German metering firm Ista’s buyout loan which had total leverage of 7.25 times set the precedent for higher leverage in May before the high-yield wobble.
The European leveraged loan market appears to have shrugged off the recent bout of market volatility and the fourth quarter is expected to see similarly aggressive leveraged multiples.
Beverage can maker Rexam’s healthcare packaging business is expected to have total leverage of around 7.25 times on its buyout financing.
“Unless there is turn in the wider macroeconomic and political market, rising leverage levels will be supported in the fourth quarter,” the senior leveraged finance banker said.