Debt: into the void

Figures suggest that sponsors are starting to look to alternative sources of credit as banks continue to pull in their horns

2012 was a tough year for the banking sector, judging by the full-year figures from Thomson Reuters released in January: global investment banking fee totals were down by 3 percent on 2011, with particularly acute falls in Europe (down 17 percent) and Asia (down 18 percent). It was a particularly chastening year for the City of London, thanks to the LIBOR-fixing scandal and a host of other upsets.

Yet amidst the gloom, there were encouraging rays of light. At $22.5 billion, debt capital market fees accounted for 30 percent of global investment banking fee revenues – well ahead of M&A advisory fees ($20.5 billion) and equity capital markets fees ($15.6 billion). Global DCM activity climbed to $5.6 trillion, 10 percent up on 2011. 

2012 was also the strongest year on record for global high yield bond and investment grade debt issuance: high yield corporate debt issuance reached $389 billion, a 38 percent increase on 2011. This helped many sponsors to tackle some of the thorny refinancing challenges in their portfolios.

What does that mean for private equity firms, as we go into 2013? One debt advisor who focuses on the European market suggested that for deals with an EV above €300 million or below €60 million, bank debt would be easy to source. The problem lies in the middle tier, where loans may be too small to attract the biggest lenders and too illiquid to interest CLOs (issuance of which has largely ground to a halt in Europe anyway). 

It is into this growing void that private debt funds are stepping. PEI research shows that 196 private debt funds are currently chasing combined commitments of $124 billion. While that won’t be sufficient to plug the gap, they will provide a meaningful and growing component within the overall landscape.