New products and greater liquidity transform European acquisition finance debt market
The European acquisition finance debt market landscape is changing dramatically as a result of an increase in liquidity and the rapid influx of alternative sources of capital offering new products, a poll suggests.
Some 70 per cent of respondents to DLA Piper's debt survey expect deal activity to increase in 2014, up from 51 per cent of last year’s respondents.
A total of 71 per cent of lenders expect their acquisition finance lending to increase in 2014, but the view is that the presence of alternative lenders is not a long-term given.
Respondents anticipate more aggressive pricing and leverage with 60 per cent expecting senior debt arrangement fees to be below 4 per cent this year, up from 11 per cent of respondents to last year's survey.
The DLA Piper European Acquisition Finance Debt Report 2014, which polled more than 250 debt providers, advisors, sponsors and corporates active in the European debt markets, found that at the beginning of 2014, the outlook for the European acquisition finance debt market looks much healthier than 12 months ago.
Combined with the gradually improving liquidity among traditional lenders, sponsors now have access to a more diverse array of finance providers such as private debt funds, bond funds and institutional investors offering a wide range of different structures.
Private debt funds have had a profound impact on the European market, participating in over 50 deals in 2013, a significant increase on 2012. Given the sheer volume of private debt funds raised and in the pipeline - over 30 have either raised money or are in the process of doing so according to fund managers interviewed for the survey - this trend is set to accelerate in 2014.
As a result, 71 per cent of this year's survey respondents expect their acquisition finance lending targets to increase in 2014. This is creating new challenges and opportunities for traditional lenders. However, according to bankers interviewed for the survey, the presence of alternative lenders is not a long-term given.
Almost one third of survey respondents (28 per cent) are expecting unitranche structures, which combine senior and subordinated debt, pricing and risk into one debt instrument, to be the most common non-bank acquisition finance debt structure in 2014. The appeal of unitranche is clear; offering higher leverage, larger hold sizes, low amortisation and greater flexibility. Yet it is not without its drawbacks - as interviewees revealed, there is some uncertainty in the sponsor community over how private debt funds will approach a business in distress.
As a result of the greater liquidity, margins and arrangement fees have reduced significantly in the past 12 months. In 2014, the increasingly competitive market environment is expected to lead to more aggression in pricing and leverage: 60 per cent of respondents expect senior debt arrangement fees to be below four per cent this year, up from 11 per cent of respondents in 2013; with 23 per cent expecting leverage to be over 4x, up from 16 per cent last year and one per cent in 2012.
Alexander Griffith, debt finance partner at DLA Piper, says: "This is the fifth year that we have conducted this survey and last year's results first highlighted the rise of the private debt fund sector and innovative debt funding products. A year later, and as green shoots begin to show in the key European economies, the true impact can really start to be felt as activity in the market goes from strength to strength."
David Miles, London head of debt finance at DLA Piper, says: "The acquisition finance market is transforming at an ever increasing pace thanks to the increased liquidity and greater range of products and providers. Seeing how traditional senior debt banks and mezzanine providers respond to unitranche and the opening of the IPO markets will make for a very interesting 2014."
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