The debt markets have been characterised in recent years by an increase in the number and size of debt funds and the amount these funds can deploy to a particular deal. Conditions have been exceptionally favourable for borrowers and we expect this to continue in the coming months.
However, there are potential headwinds in the short to medium term which may result in tougher conditions for borrowers in the future, such as withdrawal of Q.E., trade tariffs and Brexit related uncertainty. Against this backdrop we believe that borrowers should be stress testing their existing debt structures in order to future proof financing arrangements. Areas to consider include:
- Monetisation events through a dividend recap in lieu of an exit
- Resetting acquisition and accordion facilities in preparedness for expansion or acquisitions
- Proactively resetting covenants to ensure sufficient headroom
- Extending maturities
Highlights – Europe
- Total leverage loan volumes are broadly flat YTD at €84.9bn, reflecting a drop in M&A activity in Q3 2018
- Lender risk assessments are increasingly focusing on performance through the cycle
- Private debt funds continue to increase their market share by delivering larger ticket sizes and directly competing with the underwritten market
LBO transactions per region covered
- Q3 has seen a step up in refinancing activity and this is expected to continue in Q1 2019 as companies prioritise flexibility and covenants over headline price, ahead of Brexit uncertainty
- Investor demand is exceptionally strong for resilient, recurring revenue type deals which are continuing to obtain terms more akin to large cap deals. However, lenders are remaining disciplined for weaker credit stories
Type of refinancing by structure
The UK continues to see strong private debt activity in the market with fund-led deals comprising more than 50% of the deals in Q3 2018.
- The French market has continued to perform well, with increased volumes in Q3 compared to Q2 2018, reflecting buoyant M&A volumes
- We’ve seen an increased focus on lender-friendly documentation; with credit investors resisting certain perceived ‘large cap’ features
- Slight widening in margins for single TLB (Term Loan B) to 400-425bps (+25bps versus Q2 18)
Number of deals per quarter
Strong leveraged financing activity has continued in France, with issuance broadly flat at 27 deals in Q2 2018 (vs. 30 in Q2 2018) with LBOs accounting for over two-thirds of deal flow.
- Q3 2018 has been characterised by lower activity versus Q2 and the prior year reflecting lower M&A activity
- Competition amongst debt funds remains very strong, as funds look to increase portfolio exposure to DACH
- Senior banks increasingly participating in the now well established 1st/2nd out financing structures
Issue volume per deal type
In Q3 2018, the DACH leveraged loan market saw a continued fall in activity, with institutional lenders continuing to take market share from banks.
- In Spain, leveraged financing activity has nearly doubled to 16 transactions in Q3 with (9 in Q2 2018)
- Increased appetite from banks with new lenders entering the Spanish market (e.g. Credit Industriel et Commercial, Banco Pichincha)
- Direct lending activity is increasing in the region, albeit banks continue to dominate sponsor-backed financings, closing c. 90% of the transactions during the quarter
Number of deals per quarter
Spanish leveraged finance activity peaked with 16 deals closed in Q3 2018, driven by an uptick in refinancing activity vs Q2.
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