High-yield issuance for PE buyouts hits six-year low

Only a handful of private equity sponsors opted to finance an acquisition with a bond last year with the lowest aggregate value recorded since 2010 at €12bn – 40% down on 2015 levels. The lion's share (€9.5bn) was issued in the second half of the year.

The overall dip is partly due to comparably better loan market conditions such as low pricing and loose documentation, as well as the lack of pre-payment penalties compared with bonds, according to Marlborough Partner's Quarterly Snapshot.

A total of five bond issuances backed a leveraged buyout in 2016 – German fashion retailer Schustermann & Borenstein in December (Permira), Italian gaming group Sisal in July (CVC Capital Partners), Danish transportation group Scan Global Logistics in June (AEA Investors), Dutch fleet management business Leaseplan in March (a consortium of investors including TDR Capital) and Solera (Vista Capital) in February, according to unquote" sister publication Debtwire. Three – Schustermann, Scan and Leaseplan – were debut issuers.

We are going through the most borrower-friendly period in the history of leverage finance, with even more flexibility, lower yields and higher leverage multiples than those experienced in 2007" – Romain Cattet, Marlborough Partners

Private equity houses' caution towards the high-yield market had a big impact on levels of overall bond issuance in 2016, down 17% to €53bn compared to €64bn in 2015, according to the Marlborough report. Corporate issuance was steady at €41bn and broadly in line with the previous year's €44bn total.

Many sponsors tapped the more favourable loan market to finance their transactions and the UK alone issued a total of €3.1bn in the last quarter of 2016, significantly higher than the preceding quarter, but in line with the €3bn figure for Q3 2015.

The buoyant final quarter was mainly due to opportunistic recaps and refinancings as a result of spreads going down once the Brexit storm had calmed, according to Marlborough's report. The debt adviser said a total of 46% of the volume issued in 2016 can be attributed to this type of opportunistic transaction – with some coming back to market within just nine months of the initial deal.

Overall, European issuance in 2016 was the highest since 2008 totalling €71bn. This was up 15% on 2015 figures.

Loan market flexibility and pricing
Marlborough partner Romain Cattet said: "We are going through the most borrower-friendly period in the history of leverage finance, with even more flexibility, lower yields and higher leverage multiples than those experienced in 2007. The amount of available liquidity is such that some deals are now repricing less than six months after completion."

Term loan B (TLB) spreads tightened towards the end of 2016 to finish at roughly 380 basis points (bps) by year end (80bps tighter than 2015), boosted by the almost total disappearance of a Euribor floor. This is in comparison to spreads widening at the end of 2015.

US issuers with European operations also took advantage of more favourable yields to issue debt in Europe, in what has been dubbed a "reverse yankee" transaction. Cross-border volumes in 2016 were up 25% to €20bn compared with 2015, according to Marlborough.

Total leverage remained at an average of 5x in 2016, in line with 2015 levels – but senior leverage crept up to a lofty 4.5x, which is the highest level since 2007. With liquidity and leverage readily available, so too was flexibility in the loan markets, with each transaction having an average of only 1.3 covenants and cov-lite terms standard fare in deals over €500m, according to the debt adviser.

The report also notes that unitranche providers continue to take market share from banks, with the competition exacerbating the leverage and documentary flexibility on offer.

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