EUROPE - 2010: Leverage renaissance

Emanuel
11 January 2010

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"Good deals this year shouldn't fall through because of lack of financing as there is enough debt around to service the expected volume of transactions," says Lloyds' Ian Sale, who is optimistic about the prospects for leveraged buyouts in 2010.

According to Sale, managing director at Lloyds TSB Acquisition Finance, who is responsible for the mid market leverage team in London, shortage of debt shouldn't be a problem in 2010. What is more, although other issues that had brought dealflow to a trickle in 2009 still persist, such as poor trading visibility and excessive vendor expectations, Sale notes that the deal pipeline is looking better for the first quarter - certainly when compared to this time last year.

Additionally, the overhang of deals announced at the end of 2009 to be completed early this year can give the market additional momentum. Indeed last year ended on a more positive note: Apax Partners' £975m acquisition of Marken, announced in December, was one of the largest in 2009 and more importantly had the biggest solely-underwritten senior debt piece since the Lehman collapse. Lloyds confidently underwrote the entire package after Apax had taken it on and is looking to secure a group of banks and institutions, including international players, willing to take on significant tickets.

Such underwritings are, however, expected to remain the exception, reserved to best-of-breed companies and it is likely jumbo transactions may need to compete hard for the potential pool of debt available at the large end of the space, Sale points out.

What is more, in the mid market clubbing will remain the name of the game this year. "Private equity houses often prefer having two lenders club together even for debt tickets around the £25-£30m mark as they want to reserve some firepower from the banks to grow the company with acquisitions at a later stage," notes Sale.

While 2009 was a year of survival, 2010 could be the year when deal activity kick starts once again. Of course no one expects the deal flurry from the market's heyday, especially as deals seem to complete in slow motion with longer lead times and rigorous due diligence processes. But this perhaps that is a healthy reversion to basics. Nevertheless, the market is taking its first steps to normality and, with banks truly open for business, the leverage is there to support it - at least for now.