Evaluation: European dealmakers face shrinking debt choices as recession danger looms


  • M&A financing seen as costlier and more durable to entry
  • Buyers flee junk bond market amid financial tightening
  • Riskier debt gross sales down 77% to this point this 12 months
  • Morrisons underwriters take a success – supply
  • Personal lenders step in with uptick in hybrid financing

LONDON, Might 16 (Reuters) – European dealmakers are struggling to finance company takeovers as concern that the area’s economies might dip into recession is prompting debt buyers to demand larger rewards for the dangers they’re taking to get offers over the road.

International financial uncertainty and market volatility triggered by the Russia-Ukraine battle, coupled with financial tightening from the Federal Reserve and the Financial institution of England and expectations the European Central Financial institution will observe swimsuit, have made deal financing costlier and more durable to entry, bankers and analysts say.

Greater than $390 billion value of M&A offers have been introduced in Europe since January in comparison with $365 billion in the identical interval final 12 months – virtually doubling 2019 volumes of $199 billion in the identical pre-pandemic window, in keeping with Refinitiv knowledge.

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Whereas banks have agreed to offer the required financing, some are having to sweeten phrases to search out lenders prepared to tackle chunks of their debt.

“There are a lot of variables out there and buyers might be cautious till these settle and the bid/ask hole tightens, particularly in Europe,” stated Anthony Diamandakis, world co-head of Citi’s asset managers franchise worldwide.

“We aren’t seeing many new debt commitments for the time being as a result of the M&A deal quantity feels mild.”

International company debt yields have soared practically 200 foundation factors on common this 12 months. These on euro-denominated high-yield bonds have doubled to five.5%, ICE BofA indexes present.

Dealmakers say the financing battle has not marked a loss of life sentence for brand new offers, and whereas M&A volumes are at the moment subdued they might nonetheless get better later this 12 months.

However within the meantime some debt gross sales have run into bother.

In Britain, grocery store chain Morissons’ 7-billion-pound ($8.6 billion) takeover by U.S. buyout fund CD&R is essentially the most notable deal to have hit a snag because the syndication of its debt pile has been delayed by about six months.

Lead banks who absolutely shouldered the Morrisons financing are actually left with greater than 3 billion kilos of debt but to be syndicated, one supply acquainted with the discussions stated.

The banks – Goldman Sachs (GS.N), BNP Paribas (BNPP.PA), Financial institution of America (BAC.N) and Mizuho (8411.T) – needed to place a bit of its debt value about 1 billion kilos at a reduction of round 10% to have the ability to promote it to personal lenders, the supply stated.

Goldman Sachs and CD&R declined to remark whereas Morrisons and the opposite banks weren’t instantly obtainable.

M&A financing packages are normally underwritten months prematurely. Funding banks assure a sure rate of interest to potential patrons but additionally embody so-called “flex” provisions within the deal phrases permitting them to regulate the ultimate pricing by a certain quantity if markets transfer considerably.

If these usually are not sufficient to cowl the rise in market charges, the debt will get syndicated at deep reductions with banks making up the distinction, which can result in a loss if it exceeds their charges.


Leveraged buyouts got here underneath rising scrutiny after the monetary disaster as they’re sometimes funded by loading a big quantity of debt onto the goal firm towards its belongings.

Due to their excessive debt/fairness ratio, they typically contain the issuance of non-investment grade excessive yield bonds, typically dubbed junk bonds as they carry the next danger of default.

However cash is fleeing the asset class this 12 months; European excessive yield retail funds have suffered $20 billion of outflows, or 6% of belongings underneath administration, in keeping with BofA citing EPFR knowledge.

“Numerous fastened charge excessive yield buyers have money at the moment, however are fearful about outflows. So long as that fear is on the market it is going to be tough to cost sizable new offers,” stated Daniel Rudnicki Schlumberger, head of EMEA leveraged finance at JPMorgan.

International excessive yield bond issuance is down 77% for the reason that begin of the 12 months, Refinitiv knowledge reveals, with European volumes down practically 75% in comparison with final 12 months.

After a 10-week shutdown of the European excessive yield market, the longest since 2009, a pool of banks led by HSBC (HSBA.L) and Barclays (BARC.L) launched an 815 million pound bond sale in April to fund Apollo’s takeover of British homebuilder Miller Properties.

A sterling tranche was priced at a deep low cost of 93.45 cents to lure buyers, with the banks additionally providing the next yield than indicated at first of selling, a lead supervisor stated.

HSBC declined to remark whereas Barclays and Apollo weren’t instantly obtainable.

Equally, French non-public fairness agency Ardian opted for a junk bond to fund its 1.1-billion-euro ($1.2 billion) buy of Italian drug agency Biofarma Group on Might 6. learn extra

BNP Paribas (BNPP.PA) and Nomura (8604.T) organized a 345 million euro floating-rate bond to finance the Biofarma buyout and ended up granting a big low cost in addition to tightening investor protections within the bond documentation to get the deal over the road, a doc seen by Reuters reveals.

Nomura declined to remark whereas BNP Paribas and Ardian weren’t instantly obtainable for remark.

Buyout fund CVC Capital Companions’ foray into a serious European soccer league additionally struggled because the non-public fairness agency funded a 1.99-billion-euro funding in Spain’s La Liga by a 850-million-euro bond sale. learn extra

Goldman Sachs, which led the bond sale, needed to provide heavy reductions on each tranches, in keeping with a deal doc seen by Reuters. CVC and Goldman Sachs declined to remark.

Whereas most M&A financing is slated for the leveraged mortgage market, which has fared higher than junk bonds as floating charges provide buyers safety from rising charges, mortgage gross sales have additionally slowed. Dealmakers say banks have turn out to be extra selective in funding transactions.

“You need to have a transparent understanding of any pass-through points like vitality publicity or a possible drop in shopper demand,” stated Simon Francis, head of debt financing in EMEA at Citi.

“It is about ensuring you could have a grasp on how efficiency might be impacted by what is going on on within the wider world.”


Personal lenders resembling Ares, Blackstone (BX.N) and KKR (KKR.N) are attempting to fill the hole by charging increased rates of interest to offer money to potential patrons and rescue their offers, bankers and buyers say.

The development has been gaining traction since Russia invaded Ukraine on Feb. 24.

“Any staple financing that was agreed by banks earlier than the battle in Ukraine will most likely have to be re-evaluated,” Francis stated.

This 12 months U.S. non-public fairness agency Thoma Bravo has repeatedly bypassed conventional banks and turned to a gaggle of personal lenders together with Owl Rock Capital, Blackstone, Apollo International and Golub Capital to finance the $10.7 billion buy of enterprise software program agency Anaplan in March.

The U.S. tech-focused funding agency went on utilizing Golub, Blackstone and Owl Rock in April to finance the $6.9 billion takeover of New York-listed cyber safety firm SailPoint Applied sciences.

In Europe, non-public lenders have primarily operated as a part of so-called hybrid offers, the place financing is sourced from each non-public and public markets.

Chris Munro, head of worldwide leveraged finance at BofA, stated quite a lot of upcoming financings might be backed by hybrid constructions.

“Banks are nonetheless open for enterprise and underwriting offers, it is simply phrases have modified and constructions are a bit extra conservative,” he stated.

But, with banks turning leery, non-public credit score funds are set to increase their features.

“We’re transferring to a part of combine and match. Personal fairness funds are going to get fairly inventive round a few of their financing,” Citi’s Francis stated.

($1 = 0.8085 kilos)

($1 = 0.9605 euros)

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Reporting by Pamela Barbaglia and Yoruk Bahceli, further reporting by Andres Gonzalez; Enhancing by Emelia Sithole-Matarise

Our Requirements: The Thomson Reuters Belief Rules.



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