As this last issue of 2007 goes to press it is time for us at IFR Buyouts Europe to reflect on what has become a pivotal twelve months for the private equity industry. With the bubble truly burst we can but conclude that January 2008 will be very different to January 2007 – to what extent remains unknown.
On the face of it the leveraged finance market is in dire straits on both sides of the Atlantic. Deals are being pulled from syndication and bookrunners are scrabbling to discount deals to levels where they can secure investor support.
“The situation is grim,” according to a Europe based investment banker. “It feels like a repeat of history. At the macro level there are bank results, write-downs, nervousness in equities all pressing down on the market. There is a now a real fear of recession adding to the gloom. There is a batten-down-the-hatches attitude in the market – even if it means selling below par. Just like in July, a strong order book on a given deal can evaporate as the market goes south.”
In both the US and Europe the high-yield primary market is now likely to remain shut for the rest of year. Recently priced US deals have underperformed and issuers are postponing new offerings, refusing to pay the significant price concessions needed to get deals done.
On example in Europe was the failure to win commitments for
“There is no chance of a high-yield deal in Europe – anyone coming with a deal would have to be blind or desperate. There should be some price that a deal could be done at, but right now I’m not sure that is true,” said one high-yield trader.
However there are a few glimmers of hope. The better liquidity compared with the summer is seen as the key to getting the market back on its feet. In Europe, an investment banker itemised the liquidity that is now sidelining itself, saying: “Banks can be brought into some deals on a relationship basis, especially for bigger credits. CLO bid is scarce but would rather invest than not and prefers to buy in primary right now and will look at deals that reflect new era CLO cost of funds – a large deal for a good credit paying 325bp–350bp over Libor will be looked at. Hedge funds will always invest when they see value but are not going to buy if they are worried about prices falling tomorrow.”
But at this stage it is just a case of waiting to see what the New Year brings.