Refinancing craze highlights debt market remodelling

Not only have UK loan market volumes almost doubled since last year, but of the €11.9bn distributed so far in 2013, 49% has been used for private equity refinancings, compared with 46% used to finance acquisitions, according to Marlborough Partners.

The sheer volume of refinancing activity has many commentators hailing the fall of the long-fabled debt wall. However, it is arguably more accurate to label recent activity as more of a remodelling of the debt market.

In the third quarter of this year alone, the UK market witnessed a raft of big-ticket recapitalisations. Last month, Goldman Sachs refinanced Hastings Insurance Group by placing a £416.5m senior secured bond on the Irish Stock Exchange. Other high-profile transactions include BC Partners' ￡200m dividend recap of Phones4U, and Exponent Private Equity's ￡190m refinancing for Trainline, which saw the buyout house realising part of its original investment.

While the debt markets, particularly at the top end, are heating up, this latest phenomenon is perhaps more to do with change than with the hangover from the 2008 crisis.

Speaking on the mid-market financing panel at a recent BVCA summit, Richard Roach, managing director of RBS Structured Finance, said the lack of deals over the past 12 months has altered the mix of transactions in the loan market. RBS is more comfortable with dividend recaps today compared to a year ago: "Especially when management and private equity keep some skin in the game."

Changing of the guard
Ed Cottrell, head of growth and acquisition finance at Investec, is not convinced that current activity in the debt markets is private equity's earnest attempt to tear down the wall of maturity. "The good companies that were bought in the boom years have probably already refinanced. We're now seeing recapitalisations of those companies that are just ticking along or moving sideways." Cottrell notes that recent heightened refinancing activity is more a symptom of the lacklustre M&A market, where secondaries are losing steam and trade sales remain muted.

Also speaking on the mid-market financing panel at the recent BVCA event, 3i director George Archer said that when exploring financing options he benchmarks senior, unitranche and mezzanine deals against each other. This highlights the genuine advancement of the debt market since the crash, with buyout houses now exposed to a wider range of products than in the pre-crisis days.

New structures appear to be the fruit of new players filling the chasm left by constrictive regulatory pressures on the banks. Indeed, August Equity chairman Richard Green revealed he is currently speaking to a new debt fund that will be targeting credit transactions as low as £1-5m.

While refinancing activity remains exclusive to the upper end of the mid-market for the time being, Archer agrees that new players are having an impact: "Banks have been consistent and look at all opportunities, but alternative funds are creating a competitive tension."

The current positive momentum in the debt market is at least easing the pressure on those assets that have been languishing in buyout portfolios. And until the confidence and optimism felt at the macro level translates into a serious resurgence in the M&A market, fund managers can at least take heart in more options when it comes to improving capital structures.

Furthermore, while the wall of maturity continues to loom over the industry, the rapidly changing debt market provides some level of hope, thanks to a swathe of new entrants, that pricing and fees might come down just in time.

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• Topics
• UK / Ireland
• Financing
• Marlborough Partners
• Goldman Sachs
• BC Partners
• Exponent Private Equity
• BVCA
• Royal Bank of Scotland
• Investec
• 3i
• August Equity LLP
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