Lenders sway fate of auctions in volatile LBO market

In a volatile M&A market plagued by rising interest rates, lenders are being brought into the tent before bidders to provide financing views that can, ultimately, make or break a sale, sister publication Debtwire reports.

"What we're finding – especially in the large-cap space – is that the availability of financing will dictate whether or not there will be a formal auction process," said the first source, a direct lender.

This development marks a divergence from the traditional auction process, in which lenders are granted access to detailed financials and company management via the sellside later down the line. That private credit's view is being sought before private equity's underscores the enhanced influence of financiers in a less borrower-friendly market, where terms have tightened as financing costs have soared in lockstep with rate hikes.

At a time when syndicated financing remains limited and direct lenders are cherry-picking deals, "very few are heading into processes now without knowing where the debt is going to come from," said one investment banker. "The hard work will still be done at a later stage, but lenders will be engaged early on."

A recent example of an asset touted to lenders before private equity suitors to mitigate completion risk is Princes Group. Houlihan Lokey, which is overseeing a carve-out of the pan-European food and drinks giant from its Japanese owner, began approaching lenders in early January. Then, later that month, the advisor orchestrated a lender education session with Princes Group's senior management, allowing financiers the opportunity to drill deeper into the company's prospects from a credit perspective, according to the first source.

Only after collecting preliminary financing views did Houlihan Lokey decide to formally launch an auction process in the first week of March, when the bank distributed information memoranda to private equity bidders, this source continued. Houlihan Lokey did not respond to a request for comment.

DC Advisory deployed similar tactics earlier this year when it brought Elysian-owned United Living to market. In January, the financial advisor soft-launched a sale of the UK-based property services group by reaching out to a handful of lenders, rather than circulating teasers to prospective bidders. "It felt like Elysian was terrified of the process falling over, so they were mega-careful to get the debt lined up ahead of M&A proceedings," the first source said.

"It wasn't a staple – just making sure that they felt as good as possible that lenders would be there for bidders." Suitors – including a host of sponsors – were contacted by DC Advisory at a later stage, the same source explained, after which additional calls between lenders and management were hosted before due diligence commenced. DC Advisory did not respond to a request for comment on the auction, which is ongoing.

Plays to gauge the willingness of lenders to offer financing before committing to asset disposals were first flagged last year. In October, it was reported that M Group backer PAI Partners had hired Citigroup to approach lenders about sourcing some GBP 600m of debt before launching a sale of the UK infrastructure provider, which the bank had been mandated to oversee eight months prior, in February. However, following preliminary talks with financiers, a GBP 2bn auction process that was slated to launch in Q4 2022 has yet to materialise.

By reversing the order in which an asset is typically marketed, financial advisors and vendors can quickly form a view on whether a private equity-led buyout is viable or not. If the level of financing on offer is deemed insufficient, then the vendor has the option to call off the sale until market conditions improve, or seek out alternative routes to liquidity. With some luck, the vendor can make this decision before details of a transaction leak into the market.

This approach can also spare sellside advisors from the reputational hangovers that failed auctions often inflict. "So many deals recently have ended up dying due to a lack of financing," the first source said. "This is a way to prevent sellers and their advisors from ending up with egg on their face should a deal collapse, because the sellside can claim, ‘well, there was never really a process' if they went to lenders first then decided not to approach bidders."

Some bankers – while admitting this strategy is gaining traction in a tough market where deal count in Europe is down 34% year-to-date, according to Dealogic data – are keen to play down the idea it is widespread.

"Deals where the debt is critical, then, yes, lenders are getting involved a lot earlier – but it differs from sector to sector," said one banker. Echoing this, another sellside advisor said that "while we are seeing this more and more… it's not one-size-fits-all – you have to look at the individual situation".

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Exits
• Investments
• Buyouts
• Benelux
• CEE
• DACH
• France
• Southern Europe
• UK / Ireland
• Nordics
• Mergermarket