Europe’s loan market on hold

The backlog of transactions in the European leveraged loan market has barely moved since mid-August, when it stood at about €76bn (US$110bn), according to a recently published Standard & Poor’s research report.

“Only a handful of those transactions have been completed, and the pipeline currently stands at about €75bn (US$108bn),” according to S&P analysts, Taron Wade and Paul Watters.

The market has not stood still, however. “About €22bn in backlogged deals is currently going through a syndication process.

“This includes nearly €10bn of transactions from over the summer that either underwent pricing flexes or changes in structure, and another €12bn of transactions that were postponed or mandated but never made it to market,” they commented.

Arrangers are in discussions with lenders, often trying to negotiate a deal that works for both parties, mainly through a flex or original issue discount.

Most borrowers that have access to the market are seeking funds of less than €1bn, and in many cases less than €500m.

Relationship lenders, which often include regional banks, are still willing to provide funding.

Examples of deals mandated over the summer and since completed include those of Dutch shrimp processor Heiploeg and UK healthcare business Healthcare at Home.

Heiploeg’s transaction was a refinancing of €246m and Healthcare at Home’s LBO raised £175m.

“Where the market remains uncertain is for larger transactions supporting private-equity buyouts,” S&P stated.

The syndication of £7.27bn of senior and £1bn of second lien debt backing the purchase of UK high street chemist Alliance Boots has been put on hold.

The £750m of the mezzanine piece on the deal is understood to have almost completed, however.

Large buyouts such as those of Maxeda and Springer Science+Business Media Deutschland have been pulled from the market and it’s unclear when they will return.

And there are quite a few other jumbo LBO transactions in the pipeline, including £4.8bn of debt backing the merger of Saga Group and the Automobile Association.

One solution, S&P suggests, is to restructure transactions to make them more appealing to bank investors.

For example, Belgian cable operator Telenet Group has reduced the maturities on the tranches in its €2.3bn deal, added more amortising debt, and included another maintenance covenant — interest coverage — alongside the already existing leverage covenant.

Most industry observers believe, however, that the backlog of private equity deals, which rely heavily on debt, will be on hold until the end of the first quarter of next year.

An estimated US$300bn to US$350bn of equity is available. It’s the lack of liquidity in the market in the form of debt that is holding up the leveraged loan pipeline.