Private Equity firms are turning increasingly to asset-backed finance as a way of reducing the cost burden of more expensive senior debt.
More than 60% of top firms said that securitisations were becoming a more important source of replacement capital to ease repayment schedules, a new study from Demica said. Respondents estimated that 12% of deals already employed trade receivables securitisations, which could cut financing costs at portfolio companies by 100bp to 150bp.
The study focused on 40 European private equity firms to ascertain views on the role of securitisations as a post-LBO financing tool. The majority, some 57% of respondents, felt that leveraged finance would become more expensive over the next two years. Two thirds pointed to a consequent focus on carve-out provisions in buyout agreements, which build in flexibility for alternative financing structures.
Alex Glass, a vice-president at JP Morgan Securities, said that private equity’s aim of reducing financing costs coincided with strong demand for securitisations in the asset-backed market. “Relative to AAA credit card or mortgage backed paper [that is 60%-plus of the structured finance supply in Europe], securitisations offer a strong spread pick-up compared to what investors are currently seeing in the market, so there is significant demand,” Glass said. “The convergence of issuer objectives and investor demand will continue to fuel a growing trend for these types of deals – satisfying a demand that currently exceeds supply.”
A further 62% of the survey respondents estimated the proportion of post-LBO transactions using securitisations would rise in future. The current percentage of 11.9% would rise to 16.3% by the end of 2006, they said. That would make for a growth rate of 37% in the use of post-LBO securitisations over the next two years.
Brian Feighan, executive vice-president of securitisation technology provider Demica, said that securitisations also offered softer amortisation than senior debt, easing cashflow burdens for highly leveraged portfolio companies. “Flexible structures in trade receivables securitisations also ensure that both the term and the funding amount can be optimised to best suit the exit strategy of the financial sponsors,” he said.