Findings from the PRICOA Mezzanine Monitor reveal mezzanine investments look set to reach record levels in 2001. As at September 30, 2001 e3.1 billion of mezzanine debt had been invested across Europe, compared to EURO3.6 billion for the whole of 2000. UK and Ireland continue to dominate the mezzanine market, providing 49 per cent of all mezzanine investment by value across Europe.
The average size of mezzanine tranches has more than tripled since 1993 growing from e12.7 million to e42.3 million this year. This has been largely driven by companies using more mezzanine in larger buyouts as private equity providers become more familiar with the flexibility afforded by mezzanine debt.
The number of buyouts using mezzanine has increased five-fold since 1993 and this year 23 per cent of all buyouts included some mezzanine financing, compared with only four per cent in 1993.
On the other hand, levels of high yield issuance have slowed considerably in 2001 with e6.8 billion placed to the end of October, compared to EURO14.3 billion for the whole of 2000. Also, bank lending continues to tighten, which makes it likely that the proportion of mezzanine in buyout transactions would rise.
The capital structure of private equity transactions involving mezzanine has remained stable since 1993, with transactions incorporating 50 per cent senior debt, 20 per cent mezzanine debt and 30 per cent equity.
One of the principal factors driving the mezzanine market is the decreasing level of competition from high yield and senior debt financing, says Terence Wong, executive director of PRICOA Capital. “The high yield market has been virtually non-existent in terms of new issues. That is because it is a capital market instrument subject to market conditions. Unlike high yield, mezzanine is a much more stable form of financing.” Regarding senior debt, he adds that banks have been more conservative with their lending and it is becoming increasingly difficult for buyouts in particular to secure senior debt. Mezzanine financing has been able to fill this gap.
Wong predicts that the positive attitude towards mezzanine will continue. “This is a very good time for mezzanine. The level of awareness has been increasing over time and usage has gone up, especially with larger transactions. We are not just witnessing an increase in overall value, but also in the average size of transaction.”
He describes this year’s GBP300 million take-private of Perkins Foods as a traditional mid-market deal incorporating mezzanine. Pricoa provided GBP40 million mezzanine facilities, ABN AMRO committed GBP85 million in equity and GBP165 million was provided by Royal Bank of Scotland. Core usage of mezzanine is still in mid-market deals, says Wong, but the reason for growth in this sector comes from the larger deals such as the landmark EURO500 million buyout of Enterprise Solutions from Ericsson which included a EURO100 million mezzanine tranche arranged by UBS Warburg and CIBC.
According to Thomson Financial Securities Data, the lead mezzanine arranger in European buyouts in 2000 was Bank of Scotland with $575 million invested in 24 deals, followed by Royal Bank of Scotland with $564 million invested in 15 deals – see evcj March, page 9.