Mezzanine benefits from weak financing climate

Buy-out financiers are turning to mezzanine providers as high yield issuance and bank lending dry up, study says.

Despite the difficult economic climate and a slow-down in the buyout market, mezzanine investment activity in Europe may yet reach a record annual total this year.

According to research published by Pricoa Capital Group, the European mezzanine provider, a total of E3.1bn of mezzanine capital invested by the end of September 2001 compares with E3.6bn invested during the whole of 2000.

The growth in demand for mezzanine finance is significant because activity in the buyout market is slowing. By the end of September, a mere E42bn worth of buyouts had been completed in Europe, against E65bn in the whole of 2000.

Terence Wong, executive director at Pricoa, said that mezzanine was proving particularly popular in middle-size deals, benefiting from a draught in high yield issuance. “Previously funding for middle-sized transactions could have gone either way, but now it is typically mezzanine that wins the day”, he said.

“In the mid-1990s, in deals with a transaction value of more than E250m, less than ten per cent would have used mezzanine”, Wong added. “Last year, the figure was between 30 and 40 per cent.”

The level of high yield issuance has slowed considerably in 2001 with E6.8bn placed in the year to October versus E14.3bn for the whole of 2000. Bank lending is also on the retreat at present, as lenders struggle with greater credit and syndication risk due to the tough economic outlook.

Commenting on what is driving performance in the mezzanine market, Wong said it was benefiting from a degree of flexibility that high yield couldn’t offer. “High yield is a very rigid product that has to fit around a deal. Mezzanine is much more flexible, more easily renegotiated and easily repaid.”

Landmark deals for mezzanine products this year included the financing of Apax Partners’ buyout of Enterprise Solutions from Ericsson, which used a E320m debt package including a E100m mezzanine tranche arranged by UBS Warburg and CIBC.

Since 1993, the use of mezzanine in European buyouts has increased by over five times since 1993. That year, four per cent of buyouts included mezzanine, compared to 23 per cent in 2001.