German large-cap cov-lite deals gaining ground – Commerzbank's Gladiator

Harriet Bailey: What is your view on the debt situation in Germany at present?

Thorsten Gladiator: I think the situation is no different to the wider European market. There is substantial liquidity available and good deals being done both on new deals – mainly LBOs – and refinancings. The market is fairly buoyant and attractive right now.

HB: How does the market compare to pre-2007 levels of financing?

TG: It's hard to get appropriate numbers for the German market but the European market for LBO loans, including refinancings, is up roughly 26% on last year so, from a debt perspective, the market is growing strongly. When you look at the numbers overall, roughly 60% of these loans are LBO-related, with the remainder being refinancings and recapitalisations.

What is different from 2007 is the growing importance of the high-yield bond market. Last year's volume in the high-yield market, as well as year-to-date 2014,  are as high as in the loan market, proving that the product has finally found its place in the European sub-investment-grade debt markets.

However, leverage levels are still below the high numbers we were seeing in 2006-2008. Capital contributions from private equity are in excess of 40%, which is still substantially more than before the crisis, when it was around 30%. Enterprise valuations are at around 10x EBITDA. This is a fairly high number, comparable to what we saw in 2007.

HB: What does this imply for lenders?

TG: Equity contributions are decreasing but, when we compare this to 2007, financing structures are less aggressive when it comes to leverage. This is having a positive effect as it provides financing structures with a cushion and shows a higher commitment from the sponsors.

HB: Are we seeing a shift to alternative lenders?

TG: There is an increasing availability of funds from alternative lenders and we are seeing them quite regularly on many deals. So far in Germany, though, they have only really succeeded where banks have found it difficult to finance these deals themselves, in cases where companies failed the banks' risk assessments. Overall, the German market is still as competitive as it was before the crisis. The fact that the banking market is less consolidated than the UK or French market means borrowers can choose from among a large number of financiers.

Given the high liquidity availability to finance deals from the equity side, the pressure is more on general terms for LBO loans. It's not a question of whether a bank or an alternative investor finances a deal, but more that everyone is chasing the same deals.

HB: Are there enough deals to go around then?

TG: The M&A markets are certainly up this year, although we would still love to see more deals coming to the market as there is sufficient liquidity in both equity and debt available. So far this year, the market is definitely up and we are seeing the highest market numbers since 2008. This is true for Europe as well as the German market; the two markets differ, though, as the average deal size in Germany is smaller.

In the mid-market – deals of up to €250m in financing volume – there is less pressure on covenants and we see more deals being done using traditional covenants. There's a lot of pressure on larger deals to be done on a cov-lite basis, however. The reason is that, for the smaller deals, a traditional syndicate will consist mainly of banks, while syndicates for the larger deals comprise mainly institutional investors who are much more accommodating for cov-lite deals than traditional banks. So there's segmentation in the market between larger and smaller deals.

Enjoyed reading this article? Meet more than 80 GPs and LPs at the annual unquote" DACH Private Equity Forum taking place on 7 October in Munich. For more information on the agenda and speakers confirmed, visit the website here.

For more interviews with local LPs and other key industry participants, make sure to download the 2014 Germany Report.

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