S&P: Europe's PE market shifts to high-yield bonds

As sponsors seek fresh liquidity to refinance or recapitalise portfolio companies, leveraged loans are losing ground to capital markets, the rating agency said at a conference this week.

Intermediated lending has long been the dominant source of finance for European sponsors – but that is no longer the case, according to fresh analysis by Standard & Poors.

The rating agency, which held its annual leverage finance and high yield conference Thursday, showed how capital markets had risen to prominence as a provider of corporate liquidity. “It’s a fundamental shift. The market has historically been driven by leveraged loans, because borrowers were rather scared by high-yield bonds. But the volumes of high yields we’re seeing now are among the largest on records,” commented Sucheet Gupte, director within S&P’s leverage commentary and data division. 

The agency estimated that leveraged loans – the extra lending extended to companies that already bear a considerable amount of debt – now provide barely more than 45 percent of leveraged debt issuance by European corporates, compared to 95 percent in 2008. By contrast, the volume of European high yield bonds issued in the first five months of 2013 amounted to €36.8 billion – more than the total issued on the whole of every year since 2006 save for 2010. 

“It’s a fundamental shift. The volumes of high yields we’re seeing now are among the largest on records

Sucheet Gupte

While these figures comprised financing raised by all types of borrowers, the trend was especially marked among financial sponsors, Gupte said. The volume of high yield bonds issued by private equity firms in the two months to end May 2013, at nearly €7.5 billion, was higher than volumes raised during any quarter since Q1 2006. 

The contribution of new forms of lending helped bring down average equity contributions to leverage buyouts, the research also showed. At 47.5 percent during the 5 months to June 2013, they were lower than the 52 percent observed last year, and the 53.1 percent reached in 2009. Debt to EBITDA ratios also increased, inching very close to 5x. 

The bulk of high yield bond issuance was raised in the UK, Germany and France, the figures shown. But other countries seemed to benefit too: Italy and Spain, for example, each raised close to €1.8 billion between January and May 2013. 

A number of conference attendees doubted whether this would lead to a return to much larger transactions, however. “The age of mega buyouts is truly over,” a senior member of S&P’s corporate research team told Private Equity International. “Rather, I anticipate that a portion of these proceeds will be used to take minority participations, recapitalise weak assets or refinance existing loans.”

Faced with looming maturities, he cautioned, some portfolio companies would still struggle to meet their repayment obligations. That would likely lead to a number of these being taken over by their senior lenders, he said.

“For a sponsor, recapitalising a company often means crystallising a loss on your existing equity – now worth close to zero – and taking money out of a new fund. You really have to believe in the business to be willing to do that. It’s sometimes much easier to hand over the keys to your creditors.”