Syndication woes spell trouble for German buyouts

The number of buyouts in Germany is on the increase and headline deals like the secondary buyout of Jack Wolfskin have raised hopes the market has returned to its former health. However, a new threat has raised its head, as leverage markets are once again thrown into turmoil.

Thorsten Gladiator, head of leveraged finance origination Germany at Commerzbank corporate and markets explains that, "German financing structures and terms are a little bit more conservative given the midcap nature of the current German LBO market because syndication here is, to some extent, more focused on banks. There is less demand right now from institutional investors for small and midcap deals."

The highly leveraged buyout of Jack Wolfskin, valued at €700m including a debt structure of €500m demonstrates some of the current difficulties in the debt market. Debt providers Bank of America Merrill Lynch, Morgan Stanley, UBS and IKB have faced difficulties in selling on the senior leverage facility and were forced to add a €70m second lien loan tranche with an interest rate of 9.5% in order to raise the market's appetite.

Aside from uncertainties around the economic climate, Gladiator points out that there are a number of other reasons for the deterioration of the debt market and the decrease in liquidity from institutional investors.

"Due to supply and demand imbalances in the first and at the beginning of the second quarter, it was easier to arrange deals structured to meet the demand of institutional investors. Right now, the situation has turned and most of the liquidity that these funds had has been spent and there is little new liquidity for them," he says.

This means deals must be structured with banks in mind rather than institutional investors. This is likely to lead to far less aggressive deal activity in the second half of 2011.

So far this year Germany has seen roughly €4bn worth of LBO loans and Gladiator believes this will fall in H2. However, he is positive that, although the second half of 2011 will be weaker than the first half, it will still be far stronger than last year.

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