“The market is difficult but the big deals are still out there”

Royal Bank of Scotland’s Jim Stevens and Bruce McLaren discuss the prospects for mezzanine finance in the current environment and consider the likelihood of Europe’s first E400m mezzanine transaction.

RBS Mezzanine was formed in 1997 to help bridge the funding gap between debt and equity in management buyouts, buy-ins and leveraged acquisitions throughout Europe. The division was initially set up with £150m to develop a portfolio of junior and mezzanine debt products. In the past five years, it has invested over £820m in 114 transactions and in 2001 underwrote E500m in mezzanine transactions alone.

Last year RBS opened offices in Milan and Madrid and anticipates an increase in activity in both markets. The UK remains the clear leader in terms of mezzanine financing, although the French and German markets have also matured as European mezzanine products have become more established.

Many mezzanine providers are bullish about prospects in the current market, and the RBS team are no expeption. According to Jim Stevens, a managing director at the bank’s corporate banking and financial markets division, said that the market downturn had not impacted on the bank’s positive outlook. “There may be less around at the moment, but with the quality deals there is certainly a role for senior and mezzanine debt. We’re pretty optimistic.”

The original driving force for mezzanine finance in Europe were the independent funds, but the last decade saw the emergence of the captive funds as major players. According to practitioners including Bruce McLaren and Stevens, the European mezzanine market has now reached a point where mezzanine tranches of several hundred millions Euros in MBO structures are a genuine possibility, as investors are looking to allocate ever larger amounts of capital to mezzanine funds.