In the leveraged debt market, the eurozone crisis has significantly impacted investor appetite and the price of financing across most sectors. While both senior secured and subordinated or high-yield debt financings were competitively priced at the start of the year, thanks to an environment in which investor appetite was growing, rates on subordinated debt have now increased significantly, while the high-yield bond market is currently exhibiting increased volatility.
In this kind of environment, sponsors’ most reliable alternative for accessing flexible and cost-effective financing is through senior loan club-style structures and mezzanine financing. The latter, for instance, provides sponsors with a sure and flexible source of subordinated debt – albeit perhaps comparatively expensive debt when bond markets are on song – that allows relatively large tranches to be structured and placed quickly with mezzanine firms.
Senior loan facilities, meanwhile, must be carefully structured in order to best meet the sponsor’s future plans for the target business. And this applies whether arranged in an all senior club or combined with a mezzanine tranche. For example, it is possible to adjust amortisation levels or add uncommitted capex facilities to release cash for investment – useful if a buy-and-build strategy is anticipated.
Further, if sponsors anticipate a change towards more favourable capital market conditions and increased investor appetite, the structure can build in a capability to issue bonds down the road.
While the bond market in Europe remains volatile, European borrowers also have the option to tap transatlantic investment demand through US dollar issuance. In this instance, the target company would need a strong transatlantic story, including a high level of dollar sales, either through geographic footprint or exposure to dollar-based industries such as energy and mining. Financing can also be structured to incorporate dollar and euro tranches that match different revenue streams and are targeted at both markets.
Buyout opportunities will continue to present themselves to sponsors thanks to falling business valuations and larger corporates spinning off subsidiaries due to increasing pressure to de-lever. Meanwhile, resilient sectors such as healthcare, food, telecoms, and business services are likely to be more attractive to banks and other lenders in current volatile markets. Within these sectors, lenders will be looking out for companies that have good growth stories and a strong international or emerging markets focus.
And long-term deal flow will inevitably be supported by the good number of European investors that remain highly liquid and will continue looking for strong investments. Wherever the demand stems from, in this environment, an emphasis on flexibility will be key to supporting the investment ambitions of private equity sponsors.