It's a great time to be a borrower, with 63 per cent of direct lenders and 55 per cent of banks reporting that they have higher acquisition finance lending targets this year, according to the DLA Piper European Acquisition Finance Debt Report 2016.
However, the report, which polled more than 300 participants in theEuropean debt markets, found that only 47 per cent expect actual deal activity this year to overtake that of 2015, with a further 47 per cent expecting it to stay the same and as such competition between lenders is set to increase.
David Miles, Head of London Debt Finance at DLA Piper, says: “Deal activity is expected to be resilient, in part due to the strong liquidity tailwinds from the huge number of alternative lenders that entered the market last year and those already active that had raised funds. This capital is captive so will be hunting for deals in the next two to three years. Continued volatility, however, is likely to impact M&A activity, driven by macroeconomic headwinds and the uncertainty around the European referendum in the UK."
Direct lenders’ optimism is likely to change their lending habits, according to most respondents, with 85 per cent of those polled believing that alternative lending funds will look to invest in larger transactions over the next year. Banks are likely to follow suit: two thirds of all respondents expect an increase in underwriting capacity this year. Direct lending funds are an increasingly important part of the market but it is possible to overstate the threat they pose to the banks.
Philip Butler, Debt Finance partner at DLA Piper, says: “Funds are definitely targeting larger deal sizes because they believe their ability to put out more capital per transactions can be competitive with the more volatile bond or syndicated loan markets. But this needs to be put into context. There are only a dozen or so funds that have the firepower to do this.”
Consensus among respondents is that senior only structures will be the most common mid-market debt structure in Europe in 2016. Only 17 per cent of survey respondents expect secured high-yield bonds to be the most common non-bank acquisition finance debt structure this year, making it the third most anticipated structure behind unitranche (50 per cent) and mezzanine (17 per cent). While liquidity was good in the first half of 2015, limited supply of leveraged buyouts kept high-yield issuance low, as did the health of the equity market, which meant that many dual-track deals ended with a listing rather than a bond.
Tony Lopez, Debt Capital Markets partner at DLA Piper, says: “2015 was not overly active in the acquisition space for high-yield. A lot of high-yield bonds were put in place in ‘bank to bond’ refinancings during the recovery from the financial crisis. Those are reaching maturity or cost-effective call dates, so refinancing will continue to be the dominant activity for high-yield during the year. How much of that refinancing activity will take the form of ‘bond to bank’ reversions is an open question, but the trend looks strong.”
