Debt providers: “One-stop shops” gaining ground

While most mezzanine players are still struggling to fight their way back into debt structures across Europe, one of them has enjoyed a good run in 2011. AXA Private Equity has put €400m from its mezz funds to work over a six-month period last year by going down the unitranche financing route.

The firm provided a €150m package to medical testing laboratory Biomnis in May, enabling the business to refinance its existing debt and to fund an aggressive acquisition strategy. In November, it single-handedly financed the secondary buyout of pharmaceuticals company Unither by Equistone with a €100m unitranche facility. The same month, AXA Private Equity also contributed €140m to the refinancing of industrial supplier FDS Group.

AXA Private Equity's approach to unitranche is based on a "take and hold" strategy in most cases. The firm can further syndicate up to a third of the loan to one or two investors and keep at least two thirds.

Combining senior and subordinated debt elements in a single loan with a single interest rate is not a new technique, as AXA Private Equity managing director Cécile Mayer-Lévi points out: "There is nothing brand new or particularly exotic about unitranche financing - on the contrary it is quite simple. Maybe that is one of the reasons it is enjoying momentum right now: it is a very reliable and straightforward way to finance deals, at a time when PE firms are not always guaranteed to secure more traditional methods of financing."

While unitranche might have seemed unnecessarily pricey when banks were practically begging buyout houses to let them fund their deals, it has gained popularity given the current lending market, alongside other forms of integrated finance. "The European market is indeed faced with a shortage of leverage liquidity," notes Romain Cattet from debt advisory firm Marlborough Partners. "Debt multiples tend to be very conservative and documentations are becoming very restrictive. As a result there is real appetite for more innovative and flexible capital providers."

Investec has also been active on the integrated finance front in recent months. Just last week it leveraged the £28m MBO of transportation services provider Gibdock with a senior and mezzanine package - it even took an equity stake in the new structure. Director James Stirling concurs that the current pitfalls faced by GPs when looking to close a deal work in the firm's favour: "We all know how difficult it is to do deals in this environment, and I think this is why unitranche - and all other sorts of integrated finance solutions - are appealing. Historically sponsors might typically work with separate senior and mezzanine providers to leverage their deals. But with enough uncertainty around deals as it is, dealing with two separate finance providers rather than one increases the execution risk; and from a vendor perspective, you may run the risk of being considered less deliverable for this reason."

Different strokes

However Investec is not primarily structuring its offer as unitranche, instead keeping all tranches separately documented and priced. "We are really hungry to do senior + mezz deals, whether sponsors want it structured as unitranche or two separate elements," continues Stirling. "In our experience clients prefer separately tranched facilities for the most part, mainly to provide greater transparency on pricing."

Cattet echoes the concerns some sponsors might have with a single-rate product: "The main issue with mezz funds providing these types of financing is the cost. You would be paying a flat 11-12% rate all-in - ultimately the senior element is priced very close to the mezzanine. Therefore it is more appropriate to very specific cases, when you would need a lot of available cash flow to grow the business for instance."

Indeed, GPs tempted by unitranche should carefully consider whether the benefits outweigh the added cost. "We structure the product with a blended rate of return that is higher than traditional senior debt - depending on each project we would be targeting 9-12% all-in," explains Mayer-Lévi. "But there is definitely a trade-off that can be attractive for some PE sponsors: they realise there is a price to pay for the benefits of this structure, and in most cases those benefits outweigh the cost."

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