HEADLINES
- M&A leveraged loan issuance in Western and Southern Europe is down 69 per cent year-on-year, while high yield is down 81 per cent
- Buyout loan and high yield bond issuance is down by 9 per cent and 52 per cent respectively
- Dislocation between buyer and vendor expectations on M&A deals expected to weigh on deal activity in 2023
After a blow-out year in 2021, European leveraged finance issuance for M&A and leveraged buyouts has declined through the course of 2022, as deal activity has tailed off in the face of unprecedented geopolitical and macro-economic volatility.
In 2022, leveraged loan issuance for M&A in Western and Southern Europe dropped by 69 per cent year-on-year, with high yield M&A issuance falling by 81 per cent during the same period, according to Debtwire Par. Issuance for leverage buyouts has proven more resilient, with loan issuance down by just 9 per cent year-on-year, though high yield fell by 52 per cent during the same period.
Buyout issuance remained steady through the first half of 2022, as the market worked through an overhang of deals from the previous year and private equity (PE) firms continued to deploy significant levels of dry powder despite the conflict in Ukraine and rising interest rates. Notable deals in the first six months of 2022 include Spanish slate miner Cupa Group pricing a €480 million term loan B (TLB) to back a US$1 billion buyout by Brookfield and Triton securing a €735 million TLB to finance the acquisition of cancer pharmaceuticals company Clinigen, according to Debtwire Par.
Through the second half of the year, however, buyout issuance has fallen away as PE tapped the brakes on new deals. European buyout deal value overall dropped from US$124.3 billion in Q2 2022 to US$25.8 billion in Q4 2022—the lowest quarterly total since the first round of COVID-19 lockdowns in Q2 2020.
Buyout loan and bond issuance has declined in line with this drop in buyout volumes. In Q4 2022 2022, loan issuance for buyouts dropped to just €4 billion, according to Debtwire Par—a far cry from the €26.7 billion of issuance posted in Q3. High yield markets, meanwhile, saw no buyout issuance at all in Q3, with just €1.6 billion in issuance recorded in Q4.
M&A headwinds build
The year-on-year decline in leveraged loan issuance earmarked for M&A in Western and Southern Europe in 2022
Moving into 2023, PE and M&A deal activity is expected to remain subdued, limiting demand for deal financing.
Vendors that were planning to sell assets in 2022 have pushed back deal timetables or pulled sales processes altogether as the gap between buyer and vendor pricing expectations has widened.
In the past year, the average earnings multiples paid for European mid-market companies declined from 11.6x EBITDA to 10x EBITDA, according to the Argos Index. Vendors have been reluctant to sell businesses at discounts to the valuations that were available relatively recently. Buyers, however, have become more cautious and are unwilling to pay yesterday's multiples for companies that now face heightened uncertainty and downward pressure on earnings.
When deals do go ahead, it is also taking longer to get buyers and sellers over the line. According to insurance advisor WTW, in the first six months of 2022, 60 per cent of transactions took more than 70 days to close, compared to just 54 per cent during the same period in 2021, and this may continue in 2023. Increased regulatory scrutiny—including new foreign direct investment regimes in a number of jurisdictions—is only adding to these delays, contributing to flatter M&A and buyout debt issuance.
Securing debt to finance deals has also become more challenging and expensive, which in turn has constrained the amount of capital buyers can corral to reach vendor price tags. Sponsors arranging debt packages to fund buyouts have seen pricing on buyout loans climb from 4.24 per cent at the start of 2022 to 5.47 per cent by the end of the third quarter before falling to 4.89 per cent in the fourth quarter. Sponsor-backed issuers have also had to offer deep original discounts (OIDs) to lure in buyers, with OIDs widening to 8.81 per cent in the fourth quarter.
Financing big-ticket transactions, meanwhile, has proven particularly challenging, with banks still trying to clear credits that have been stuck in syndication from their books. Bloomberg figures estimate that US and European banks are still holding more than US$40 billion in buyout debt that has not been syndicated. Until these positions are exited, capacity to underwrite new transactions will be limited.
A change in approach
While M&A may be somewhat muted for at least the first six months of 2023, pockets of activity will continue to deliver deals. Sustained weakness in the British pound against the US dollar and euro, for example, has been noted by US buyers. Listed companies in the UK that are undervalued could be trading at attractive discounts for US buyers investing dollars.
Companies with strong cash flows, particularly in healthcare, such as UK-based specialty diagnostics company The Binding Site—sold to US corporate Thermo Fisher in a US$2.6 billion deal—will also continue to draw interest from corporate and PE buyers.
Among the biggest healthcare deals in 2022 was the €35.5 billion demerger of Haleon—the consumer healthcare group running dental health brands like Sensodyne, as well as treatments for colds, the flu, allergies and pain—which was spun off from pharma giant GSK. The deal accounted for more than two-fifths of European consumer deal value in 2022, according to Debtwire Par.
High-quality deals that do emerge from these pockets of activity will also find that financing is available, with direct lenders continuing to lend and eager to deploy into a market where they can be selective and benefit from rising base rates as well as wider margins.
Even for jumbo financings, direct lenders have shown that they can move beyond their core mid-market offering to deliver sizeable debt packages that would usually be the preserve of syndicated loan and high yield bond options. Access Group, for example—a business software company backed by PE firms Hg and TA Associates—secured more than £3 billion for a refinancing, including a £1 billion acquisition finance line. The direct lending arm of Carlyle and private debt manager HPS, meanwhile, provided funding for Clayton, Dubilier & Rice's acquisition of the UK, Ireland and Asia operations of French services business Atalian.
Direct lenders have been able to negotiate better pricing and documentation, including tighter provisions around call protections and unrestricted subsidiaries, and include debt servicing covenants. Dealmakers, noting the changes in the market, have also been willing to take on lower leverage multiples and put larger equity cushions in place to give lenders comfort and move deals to completion.
These shifts may mean that debt packages are not as generous for lenders as they were a year ago, but, for good deals, financing is still available.
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