Mid-market European loans are beginning to adopt
the features of larger US deals, according to market
A Travers Smith and Debtwire report on private equity financing in Europe found
that an influx of alternative debt options has caused a flood
of liquidity, and increasingly borrower-friendly terms as a
"The high-yield bond market has taken a huge chunk,
large cap syndicated term loan B deals are being sold into the
US to institutional investors, and various leveraged loan funds
are providing unitranche and other financing," said Anthony
Ward, partner at Shearman and Sterling’s London
While traditional bank lenders are still active in
the market, they’re now playing a much smaller
role, he added.
Alternative debt instruments accounted for 65% of
PE financing over the past 12 months – a major shift
from pre-2008 levels – and 60% of loans issued in the
same period were either cov-lite or cov-loose.
"Losing that control, which you’ve
become very used to – especially for a bank –
is a big step to take," said Nicholas Smith-Saville, senior
analyst at Debtwire, who co-authored the report.
- A Travers Smith/Debtwire
study of the European loan market found that 65% of all PE
financing over the past year came from non-bank
- Market participants said
excessive liquidity paired with increasingly onerous banking
regulation has caused a power shift in the favour of the
borrower, with many characteristics common of US large-cap
deals incorporated into the European
- The study also found
that 60% of all loans over the past year were either cov-lite
Jörg Wulfken, partner at PricewaterhouseCoopers in Frankfurt, agreed that
a number of new non-bank lenders – particularly
insurance companies – has led to a loosening of terms
in all respects.
"It’s certainly a borrower-friendly
cycle we’re in at the moment," he said.
"I’m interested to see how the new regulation
impacts this cycle."
Banks in Europe are being hit by a variety of
regulations; most significant is a proposed structural reform
that would require the separation of their retail and investment banking
activities. If it is implemented, this could see banks
retreat from the European market, which would ultimately give
rise to further diversification of debt instruments.
But that isn’t the only issue. The
highly liquid market is also the result of central
banks’ monetary easing, which has meant favourable
rates for borrowers – with rates as low as 5.5% for
term loan B transactions.
Slow but steady
Wulfken added that this has been a gradual process
which has only really come to the fore over the past 12
But while there has been an overall noticeable
shift, there is still fragmentation between large-cap and
"The more attractive features of the bigger deals
are now creeping into the mid-market transactions [deals with
debt facilities below $300m]," added Ward. "For example, the
European loan market historically allowed very little
flexibility to incur additional debt without lender consent
– that’s now changing."
Covenant headroom has also crept up in favour of
the borrower. While historically this figure has sat at around
25%, Ward explained that 35% is now more common.
But market participants are divided over whether a
decline in lender protection is a genuine cause for
"History and analysis from the US suggests cov-lite
recovery rates are no worse than deals featuring full
covenants," said Ward. "But it remains to be seen whether that
will be true in the European context, where insolvency regimes
are very different from the US."
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