Looking back over the last ten years at the evolution of the European leveraged market, there has been significant change, innovation and at times, great uncertainty.
2006 and the first half of 2007 represented the pinnacle of the market, where private equity sponsors negotiated some of the most aggressive terms such as cov-lite, toggles, EBITDA equity cures, and mulligans. During this time, some of the biggest and iconic leveraged financings were done, such as KKR’s takeover of Alliance Boots, Nycomed Pharma’s acquisition of Altana Pharma and Global Infrastructure Partners’ acquisition of London City Airport. By August 2007, the tide had rapidly turned with Northern Rock running out of money, causing the first run on a British bank in 150 years and represented the start of the financial landslide which culminated in the catastrophic collapse of Lehman Brothers in September 2008.
The financial crisis lasted for several years, with bank lending plummeting to its lowest point, as anti-banker sentiments took hold and the regulatory environment became more hostile. This dearth of bank lending marked the end of jumbo loan financings. As a result, debt funds/alternative lenders stepped in to fill the gap left by traditional banks with the innovative, unitranche facilities becoming the key product of the financial crisis.
In Europe, the unitranche started life as a mid-market debt instrument, which has evolved to become a highly bespoke product offered in a wide variety of forms. Over the last 18 months, non-bank lenders have built up significant firepower with some of the largest debt funds being able to compete successfully with traditional banks at the upper end of the market. In 2015, GSO Capital Partners provided a GBP250 million unitranche (the largest Sterling unitranche) to finance Bain Capital’s leveraged buy-out of CRH’s UK and US brickmaking units. May 2016, saw GSO Capital Partners astound the market with its EUR625 million unitranche, the largest in Europe, to finance the merger of Polynt and Reichhold.
Big ticket leveraged buy-outs have seen their share of innovation too, with a watershed being reached in 2010 in relation to intercreditor protections required by mezzanine investors. The 2010 leveraged buyout of Worldpay saw a resurgence of the mezzanine finance market, with mezzanine financiers demanding increased protections in enforcement scenarios. This trend continued and in 2011 the EUR2.3 billion leveraged buy-out of Securitas Direct included an innovative, bespoke, mezzanine instrument which ranked behind senior secured bonds and gave the mezzanine providers bond style protections.
Post-financial crisis, European borrowers began accessing the U.S. debt markets which offered typical U.S. favourable terms. Accordingly, European investors were forced to offer increasingly borrower-friendly terms to compete with the U.S. institutional loan market. This resulted in the re-emergence in Europe, of cov-lite and Term Loan B facilities with terms which began converging with U.S. financing terms. Cov-lite deals were one of the key trends for large leveraged financings in 2014 with Ceva Santé Animale’s EUR818 million debt package being the first euro cov-lite deal since 2007. Sidecar facilities also grew in popularity in 2014. Increased dominance of institutional investors in the European Term Loan B market has enabled this convergence to continue during 2015/16.
Over the next decade, as Britain’s relationship with Europe changes, we can expect further evolution in the European leveraged finance market. Regulation will influence and shape loan terms and deal structures. We may see unitranche facilities compete with high yield bonds and perhaps become a syndicated product. Furthermore, the convergence of loan markets in the US and Europe is likely to continue as borrowers exercise greater choice in where to access capital.