Thanks to the regulatory constraints imposed on the banks in the wake of the financial crisis, debt for buyout deals has become much harder to come by in recent years. Banks have sold off assets, allowed existing loans to expire and restricted new credits – with the result that nearly five years after the collapse of Lehman Brothers, obtaining senior debt is still a challenging task for many GPs. Last year, banks provided $99.4 billion of debt in Europe, well down on the $133 billion borrowed in 2011, but more than the $75.5 billion in 2010, according to data provider Dealogic.
Challenges remain, says Mark Hudson, a senior partner at Graphite Capital. “Before the recession, for a £100 million deal, banks might have provided £60 million of debt and the remaining £40 million would be equity. Today you would be fortunate to get £50 million of debt and £50 million of equity.” Often during the boom years, GPs would only have to go to one bank to finance a deal. In today’s market, club deals are much more the norm, where often “the most conservative banks determine what the package is like”, says Hudson.
Obtaining senior debt is particularly challenging in the lower mid-market, many industry sources say. “It’s generally harder to obtain leverage for companies with EBITDA of less than, say, €15 million as the management team has a bigger impact on the business and there can often be risk concentrations around customers and suppliers,” says Ken Goldsbrough, a managing director at Houlihan Lokey.
In addition, banks have – often under pressure from governments – retreated to their domestic markets. The UK is the perfect example of this, says Ed Cottrell, head of growth & acquisition finance team at Investec. “Before the crisis, you had Icelandic banks, Irish banks, [and other] European banks operating quite comfortably in the mid-market, including French banks and Scandinavian banks. On top of that, you had all the high street banks actively participating in the lower-mid market. Right now, there’s only a handful. Lloyds, RBS, HSBC are still there for the lower mid-market – and that is about it.”
However, multiples are rising. In Q1 of this year, average leverage levels in mid market deals have gone up to 4.8x EBITDA, from 4.4x EBITDA last year, according to David Whiteley, managing director and head of leveraged loan syndicate at Lloyds Banking Group. “Leverage is definitely drifting upwards – and that is on the back of the very strong liquidity we see in the bond market and the loan market,” he says.
Financing for mid-market transactions is still available – although as one European-focused GP puts it, it helps considerably to have a “long-standing relationship and a good track-record”.
Mike Tilbury, a senior partner at Graphite, agrees. “We have done a lot of deals with RBS, Lloyds, HSBC and GE in recent years. Barclays is also increasingly coming back into the market and Santander has built up a team of experienced bankers,” he says.
But although debt multiples appear to be creeping up again, even in the mid-market, Cottrell doesn’t believe this is down to the banks. “It’s not like banks have suddenly woken up and have said: we are lending again. It’s more of a response of debt funds justifying their expensive rates by pushing debt multiples up – and that is warming up the market.”