European economic outlook
Global growth is expected to remain modestly positive over the next two years. Though there is a rising recession threat for 2021, tail risks are expected to recede with trade wars de-escalating, in part restoring lenders’ confidence.
With strong growth in the private debt market over the past few years, there is now a surplus of dry powder waiting to be deployed. Consequently, credit markets remain exceptionally strong for both new and repeat issuers – with record leverage and pricing being achieved in favoured sectors, evidencing a flight to quality by lenders.
We anticipate a wave of opportunistic refinancing and repricings in the coming weeks against a backdrop of strong buy-side demand, and an extensive pipeline of new CLO issuance expected to price (c.50 vehicles).
Leveraged finance origination forecasts (€bn)
LBO transactions per region
Percentage of deals accounted for by LBO transactions per region.
- M&A volumes in the final quarter have been tempered by political uncertainty and continued Brexit considerations
- There is an expectation that Q4 transaction ‘overhang’ will underpin increased M&A activity in H1 2020
- There is also continued evidence of market bifurcation; witness final terms secured by Roehm though syndication
UK Q4 deals by structure
Unitranche deals are continuing to dominate the market, now representing 77% of tracked deals compared to 47% in Q4 2018. Club deals remain the second most common structure at 20% of tracked deals (flat on Q3 2019).
- There has been a high level of M&A activity in the mid-market supported by more borrower friendly terms and documentation
- Increased competition between private debt funds has driven higher leverage ratios and lower margins for comparable credit quality
- After a strong Q3 2019, French leveraged loan volumes remained strong in Q4 2019 with 27 deals completed vs. 35 in Q3 2019
French deals split per quarter
After a dynamic Q3 2019, French leveraged loan volumes have remained strong in Q4 2019 with 32 deals completed vs. 35 in Q3 2019 due to robust levels of M&A activity.
- Markets in the DACH region have been slower in Q4, with lower sponsor investment activity reflecting the general trend of 2019, driven by valuation discrepancies
- However, the tech, healthcare and infrastructure sectors are still viewed favourably in the DACH market and continue to secure attractive terms
- Q4 showed higher activity among lenders versus the activity seen in Q1 to Q3, as those who had not been active in the first three quarters increased deployment
- Looking to 2020, the year has started with a very active bond market, whilst the M&A pipeline appears strong even though global market uncertainty appears to be having a limited impact on the mid-cap markets
DACH issue volume per deal type
Leveraged loan activity slowed in Q4 with 22 deals following a spike in activity in Q3 2019, with a notable increase in the use of 1st Out / 2nd Out structures.
- Despite political uncertainty in forming a stable government in Spain, there has been a higher transaction volume in Q4 2019 versus the previous year with 10 LBOs completed versus three LBOs in Q4 2018
- The top three domestic banks remain the main financing providers in fundings up to ~€100m, while international banks take the lead in larger deals with international sponsors as front running bidders
- Institutional funds continue to be very active in the Spanish market both in sponsor-driven and sponsor-less situations, with an ability to structure complexities at speed as they are more open to complex structures.
- In contrast, lenders have become increasingly inflexible as they look to manage the downside risk, especially in cyclical sectors (e.g. automotive, construction engineering, etc.)
- We expect reduced volumes in certain cyclical industrial sectors, especially as valuation mismatch between buyer and seller becomes more pronounced. In contrast, where resilience is proven, we expect a larger volume of refinancings and repricings
Spanish deals per quarter
Q4-19 continued the 2019 trend with increased leveraged loan activity, predominantly driven by an uptick in refinances versus 2018.
- The Italian lending landscape remains hampered not only by macro-economic and geopolitical uncertainty, but also the longer term structural challenges of high public debt levels, sub-par balance sheet solidity of the banking sector and weak economic growth
- The new coalition government, is reducing political uncertainty, especially on the international stage. This has contributed to a reduction of credit spreads, and consequently, the cost of debt – easing access to credit for borrowers and pushing banks to pursue leveraged finance more aggressively in order to seek satisfactory returns
- Non-bank liquidity (both private debt and higher yield bond market) growth continues, driven by the fragility of the mid-market bank landscape, favourable regulatory evolution for non-bank lenders and borrowers hunt for enhanced flexibility
DC Advisory’s European Capital Advisory contacts
T: +44 (0) 20 7856 0944
T: +44 (0) 20 7856 0925
T: +44 (0) 20 7856 0912
T: +33 (0) 1 4212 4964
T: +49 (0) 69 9720 0429
T: +49 (0) 69 9720 0431
T: +39 335 7863 957
T: +34 (0) 91 5241 124
T: +34 (0) 91 5241 124