News analysis: Europe’s debt markets

A reenergised high-yield bond market is shaping private equity fund managers’ approach towards securing credit.

A look into Europe’s high-yield bond market in 2010 shows companies backed by private equity shops making a whole lot more offerings. Sponsored issuers raised €11.2 billion in the high-yield bond market in 2010, a number flirting with the record €11.7 billion in 2006 and up significantly from the €4.5 billion offered in 2009, according to Standard & Poor’s, a credit rater.

Private equity firm BC partners is one high profile firm carrying the trend into 2011. Last week the group agreed to buy Phones 4u, a mobile phone retailing group, from Providence Equity Partners in a deal understood to be worth between £600 million (€689 million; $969 million) and £700 million. To help finance the acquisition a £430 million high-yield bond was offered by Phones 4u, which will be callable in 2018.

The trend has also been illustrated by two buyout deals this year which used only bond offerings for debt financing. Private equity firms traditionally use some mixture of senior bank loans, mezzanine financing and bonds to finance an acquisition.

Bucking the trend first in January was Advent International in its purchase of Priory, a provider of mental health and specialist care services, for an enterprise value of up to £925 million (€1.1 billion; $1.5 billion). Likewise in February PAI Partners concluded its purchase of airport ground handling company Swissport International for an enterprise value of approximately €880 million with an all-bond debt financing approach.

Previously, the speculative-grade bond market was not considered to be a reliable way to raise acquisition funding in Europe

Standard & Poor's

The two deals “are significant, as previously, the speculative-grade bond market was not considered to be a reliable way to raise acquisition funding in Europe”, said an S&P credit report. Private equity’s greater use of bond markets could also be indicative of banks’ continued reluctance to provide capital as a result of new regulatory concerns pushing for higher capital cushions, said Paul Watters, S&P’s head of corporate research, in an interview with PEI. 

The Basel Committee on Banking Supervision is in the process of creating new international standards – dubbed “Basel III” – which are the latest global agreements on capital requirements for banks following the credit crunch. The rules, scheduled to go into effect between 2015 and 2018, will introduce higher capital requirements and liquidity measures for banks.


Looking forward some of Europe’s biggest credit providers have expressed optimism for debt markets in 2011. Roughly 90 percent of respondents to DLA Piper’s European Acquisition Finance Debt Survey, which was released in February, said they expect a further recovery of debt market activity in the year ahead.

Alexander Griffith

The international law firm surveyed approximately 30 financial institutions active in Europe’s acquisition finance market, including prominent private equity lenders such as BNP Paribas, Barclays Bank and GE Capital.

Increased bank lending will perhaps be of greatest relief to mid-market private equity firms who are less able utilise the bond markets. High-yield bonds can be too expensive an option for mid-market companies considering their relatively small size, according to Jonathan Guise, co-founder of London-based debt advisory boutique Marlborough Partners, in a recent interview with PEI. However, there is a risk that banking markets will be unable to fully absorb the expected leveraged refinancing demand peak in 2013-14, said Guise.

Alexander Griffith, a partner at law DLA Piper, echoed the sentiment, saying there would be winners and losers as the refinancing “wall” arrives, in an interview earlier this year. “Whilst there will be a number of high quality borrowers looking for and obtaining refinance facilities without difficulty, many others will struggle, especially if banks are pursuing new buy-out mandates at the same time,” said Griffith in a recent interview. 

By 2016, $424 billion in debt held by European portfolio companies will be due,according to recent research from global law firm Freshfields Bruckhaus Deringer. Indeed, last year more than half (55 percent) of the €11.2 billion raised by private equity firms through bond offerings was used to refinance debt, according to S&P figures.

For bond investors this is like sitting in the passenger seat of a car, and if you are being taken on a long journey, you would feel far more comfortable if you knew the car was roadworthy

Paul Watters

For those private equity firms who tap the bond market to rework debt structures, there is pressure from investors to provide greater disclosure, says S&P’s Watters. More bond holders are moving up the payment line in the event of default now that more senior bond issues are being secured pari passu with senior bank loans, yet borrowers don’t provide the two markets the same level of information, he explains.

“For bond investors this is like sitting in the passenger seat of a car, and if you are being taken on a long journey, you would feel far more comfortable if you knew the car was roadworthy.  Similarly bond investors want to know important information that will help keep them informed, the most obvious examples being loan covenants, compliance and material amendment requests that are typically only provided to the senior banks in Europe today,” says Watters.