Analysis: European dealmakers face shrinking debt options as recession risk looms
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Global economic uncertainty and market volatility triggered by the
More than
While banks have agreed to provide the necessary financing, some are having to sweeten terms to find lenders willing to take on chunks of their debt.
"There are many variables in the market and investors will be careful until these settle and the bid/ask gap tightens, especially in
"We are not seeing many new debt commitments at the moment because the M&A deal volume feels light."
Global corporate debt yields have soared nearly 200 basis points on average this year. Those on euro-denominated high-yield bonds have doubled to 5.5%, ICE BofA indexes show.
Dealmakers say the financing struggle has not marked a death sentence for new deals, and while M&A volumes are currently subdued they could still recover later this year.
But in the meantime some debt sales have run into trouble.
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Lead banks who fully shouldered the Morrisons financing are now left with more than 3 billion pounds of debt yet to be syndicated, one source familiar with the discussions said.
The banks - Goldman Sachs (GS), BNP Paribas, Bank of America and Mizuho - had to place a chunk of its debt worth about 1 billion pounds at a discount of around 10% to be able to sell it to private lenders, the source said.
Goldman Sachs (GS) and CD&R declined to comment while Morrisons and the other banks were not immediately available.
M&A financing packages are usually underwritten months in advance. Investment banks guarantee a certain interest rate to prospective buyers but also include so-called "flex" provisions in the deal terms allowing them to adjust the final pricing by a certain amount if markets move significantly.
If those are not enough to cover the increase in market rates, the debt gets syndicated at deep discounts with banks making up the difference, which may lead to a loss if it exceeds their fees.
UNDER SCRUTINY
Leveraged buyouts came under increasing scrutiny after the financial crisis as they are typically funded by loading a significant amount of debt onto the target company against its assets.
Because of their high debt/equity ratio, they often involve the issuance of non-investment grade high yield bonds, often dubbed junk bonds as they carry a higher risk of default.
But money is fleeing the asset class this year; European high yield retail funds have suffered
"A lot of fixed rate high yield investors have cash today, but are worried about outflows. As long as that worry is out there it's going to be difficult to price sizable new deals," said
Global high yield bond issuance is down 77% since the start of the year, Refinitiv data shows, with European volumes down nearly 75% compared to last year.
After a 10-week shutdown of the European high yield market, the longest since 2009, a pool of banks led by HSBC (HSBC) and Barclays (JJCTF) launched an 815 million pound bond sale in April to fund Apollo's takeover of British homebuilder Miller Homes.
A sterling tranche was priced at a deep discount of
HSBC (HSBC) declined to comment while Barclays (JJCTF) and Apollo were not immediately available.
Similarly, French private equity firm Ardian opted for a junk bond to fund its
BNP Paribas and Nomura arranged a
Nomura declined to comment while BNP Paribas and Ardian were not immediately available for comment.
Buyout fund CVC Capital Partners' foray into a major European football league also struggled as the private equity firm funded a
Goldman Sachs (GS), which led the bond sale, had to offer heavy discounts on both tranches, according to a deal document seen by Reuters. CVC and Goldman Sachs (GS) declined to comment.
While most M&A financing is slated for the leveraged loan market, which has fared better than junk bonds as floating rates offer investors protection from rising rates, loan sales have also slowed. Dealmakers say banks have become more selective in funding transactions.
"You want to have a clear understanding of any pass-through issues like energy exposure or a potential drop in consumer demand," said
"It's about making sure you have a grasp on how performance will be impacted by what's going on in the wider world."
'MIX AND MATCH'
Private lenders such as Ares, Blackstone and KKR are trying to fill the gap by charging higher interest rates to provide cash to prospective buyers and rescue their deals, bankers and investors say.
The trend has been gaining traction since
"Any staple financing that was agreed by banks before the war in
This year U.S. private equity firm Thoma Bravo has repeatedly bypassed traditional banks and turned to a group of private lenders including Owl Rock Capital (ORCC), Blackstone, Apollo Global and Golub Capital to finance the
The U.S. tech-focused investment firm went on using Golub, Blackstone and Owl Rock in April to finance the
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"Banks are still open for business and underwriting deals, it's just terms have changed and structures are a bit more conservative," he said.
Yet, with banks turning leery, private credit funds are set to extend their gains.
"We're moving to a phase of mix and match. Private equity funds are going to get quite creative around some of their financing," Citi's Francis said.
(Reporting by