Banks seek to make hay while the sun shines

On the face of it, the recent activity in Europe's buyout markets has acted like a pressure release valve for the industry, providing a welcome home for some of the equity capital overhang, fees for the advisory community and underwriters, and a chance to rebuild banks' loan books.

It is certainly true that the current conditions play strongly into the hands of those banks in a position to lend. Senior multiples are more sensible than they were, having fallen from the 6-8X levels seen at the height of the boom to a typical 3-6X now, depending on the asset. Margins too are strong, with A tranches mostly being priced in the 400-450 basis point range, although there has been some downward pressure in recent weeks. Furthermore, equity investors are aware that they are likely to have to offer higher equity contributions.

And while the reappearance of deals like Ontex, Autobar, Tomkins and Picard Surgelés might hark back to the pre-crash rush for top end assets, it is also indicative of another factor worthy of note: appetite for underwritings in the larger market is high at the moment given the current strength of the European high-yield bond market. It is also the case that institutional appetite for syndicated paper has been boosted this year following a spate of disposals and IPOs, which had injected some much needed capital back into the system.

But despite the positives, practitioners warn that the market is far from being out of the woods. "To begin with, the macroeconomic outlook in most of the world's key economies remains at best unclear. Having some clarity in future trading is important and still very difficult for many sectors", says Simon Wakefield of SEB Merchant Banking.

Compounding this problem is the fact that the prices being sought for many private equity backed assets remains higher than the trading environment would suggest. "Recessions and financial corrections in the past have come as a relief to asset purchasers - a chance to see some of the heat come out of entry multiples. But it hasn't worked like that this time. Prices in some segments have simply remained high", adds Wakefield

As a result, most underwriters are being extraordinarily selective and looking for the safest bets. Of course, the problem associated with this is a mismatch between supply and demand and the knock-on effect this has on terms. As one senior banker observes: "Margins, fees and leverage multiples are all moving in favour of the sponsor, although thankfully the process is slow at the moment."

The final point to note is that banks are still having to deal with problem loans and this is likely to continue for the next few years, as some of the loans structured at the peak of the market move into their higher amortising phases. Of course, this can present an opportunity for banks to generate much-needed revenues if the target company is fundamentally sound and all that is required is an extension of the debt and some pricing adjustment. But, there will also be ‘basket cases' and these present a more fundamental threat.

Looking ahead, so much depends on the macroeconomic environment, but for the time being the European leverage providers that survived the downturn will look to make hay while the sun shines.

A more detailed commentary on conditions in the European leverage market will appear in the upcoming issue of unquote" Private Equity Europe.

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• Buyouts
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