Bloomberg News

European LBO Loans Fall Most Since 2009 as Debt Crisis Extends

April 19, 2012

Loans used to fund buyouts in Europe fell 44 percent in the first quarter, the biggest decline in three years, as the number of banks willing to underwrite the debt shrank because of tighter capital rules and a smoldering fiscal crisis.

Private-equity firms raised $7.9 billion of loans for purchases in the region, down from $14.2 billion a year earlier and the largest drop since the comparable period in 2009 when $465 million of leveraged buyout loans were issued, according to data compiled by Bloomberg.

European banks, having pledged to cut more than 950 billion euros ($1.24 trillion) of assets, are paring lending to speculative-grade companies even as interest margins for the loans rose more than 18 percent this year through the end of March. Less than three months after Greece’s 130 billion-euro bailout, Spanish debt risk has climbed to a record high amid signs that Europe’s debt crisis is worsening.

“The banking model in Europe is transforming from a principal model to an agency model,” said Jim Casey, co-head of global debt capital market at JPMorgan Chase & Co. (JPM:US) in New York. “Previously, banks would hold the debt on their balance sheets, but now they are increasingly acting as intermediaries and not owning the paper themselves. As that transformation continues, market share will likely become concentrated amongst banks with stronger distribution capabilities.”

Lloyds Banking Group Plc (LLOY), Deutsche Bank AG, (DBK) Credit Suisse Group AG (CSGN), Barclays Plc (BARC), and HSBC Holdings Plc controlled 39 percent of the market, while the top five arrangers had 31 percent at the end of last year, Bloomberg data show.

Market-Share Shift

European banks’ retreat allowed their U.S. and U.K. peers to gain market share in the first quarter when demand for high- risk assets recovered after the European Central Bank pumped 1 trillion euros into the financial system since December. The average bid price for European leveraged loans climbed 3.1 percent to 89.50 cents on the euro during the three-month period, according to Markit Group Ltd.

Citigroup Inc.’s position grew to 4.6 percent at the end of March from 0.2 percent in the first quarter of 2011, boosted by the $707 million leveraged financing used to back Apollo Global Management LLC’s buyout of Ghent, Belgium-based chemical ingredients manufacturer Taminco Group NV, Bloomberg data show.

HSBC, Europe’s largest bank, rose to 6.5 percent from 1.9 percent after it helped arrange 885 million pounds ($1.4 billion) of senior loans for the buyout of Iceland Foods Ltd. by Malcolm Walker, the supermarket chain’s chief executive officer.

Leverage Levels

“It’s possible to raise more than 1 billion-euro in loans in Europe at a leverage level that works for buyers of assets,” said Jeremy Selway, a managing director of leveraged loans at Deutsche Bank in London.

The amount of debt raised by private-equity firms to fund their buyouts in Europe represents an average 5.4 times the companies’ earnings before interest, taxes, depreciation and amortization in the first quarter, up from 4.9 times a year earlier, according to Fitch Ratings.

CVC Capital Partners Ltd. last month increased the amount of financing used to back its buyout of Swedish building- products supplier Ahlsell AB by 20 million euros, which will be added to the Stockholm-based company’s balance sheet, Bloomberg data show. The total size of the financing was increased to about 10.2 billion Swedish kronor ($1.5 billion) after lenders offered more than the company had sought.

Demand for buyout debt picked up as the ECB initiated its so-called longer-term refinancing operation, a plan that provided more than 1 trillion euros in loans to boost liquidity at banks and Greece obtained its bailout.

Unresolved Challenges

“Since the beginning of 2012, the combination of the LTRO and the continuing improvement in the U.S. economy have created greater appetite for risk,” said JPMorgan’s Casey. “The ECB has taken European sovereign risk off the table for the time- being, although Spain and the prospect of bank ratings downgrades are new challenges that have yet to be resolved.”

Iceland Foods benefited from the recovery of demand for high-yield assets after bids from lenders allowed it to cut the interest margin on the euro-denominated portion of its seven- year term loan B by 25 basis points to 500 basis points, according to Bloomberg data.

“With more funds looking to invest and competition from high-yield bonds, there will be growing pressure for European leveraged loan interest margin to go down,” said Mathew Cestar, head of leveraged finance for Europe, Middle-East and Africa at Credit Suisse in London. “Pricing on some of the deals recently already indicated European market condition is normalizing so we may see a reversal of the trend in late 2011 and earlier this year when European companies and sponsors took their deals to the U.S. where the market was more stable.”

Higher Rates

Average interest margin of leveraged loans used to fund buyouts in Europe jumped to a record 498 basis points in the first quarter of this year from 419 basis points at the end of 2011, according Bloomberg data. A basis point is 0.01 percentage point.

Kabel Deutschland Holding AG, Germany’s largest cable television operator, in January increased its new seven-year U.S. term loan by 50 percent to $750 million citing “significant” demand from investors. The loan pays an initial interest of 325 basis points more than the London interbank offered rate.

Schaeffler, the Herzogenaurach, Germany-based industrial- bearing maker that’s the biggest investor in car-parts manufacturer Continental AG, raised $1.28 billion of five-year term loan in February paying an initial interest margin of 475 basis points while the 450 million-euro trance pays an interest margin of 500 basis points, according to data compiled by Bloomberg.

To contact the reporters on this story: Patricia Kuo in London at pkuo2@bloomberg.net; Stephen Morris in London at smorris39@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net


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