Boom in financing options turns debt famine into feast

London: Alternative debt instruments accounted for two-thirds (65%) of private equity (PE) financing in the past 12 months, according to a new report by Travers Smith and Debtwire. Calling the shots: the evolution of European PE funding, also reveals that flexibility to make add-on acquisitions is currently the top priority when securing finance.

“The arrival of debt funds and other alternative sources has changed the landscape in Europe. While banks have recognised the need to refine and tailor their products to win back market share, this is also leading the non-bank lenders to reassess their offerings. What we have today is a highly dynamic market,” comments Matthew Ayre, head of finance, Travers Smith.

With so much liquidity in the debt markets, and a range of options from which to choose, competition is also leading to highly favourable terms for sponsors. According to those surveyed, cov-lite or cov-loose accounted for 60% of loans in the past 12 months. Non-amortising tranches have also risen in prominence, with over two-fifths (41%) of respondents saying they expected to increase the proportion of non-amortising debt in their deals over the next 12 months.

The intense competition in lending, together with the increase in valuations, is inevitably leading to higher leverage ratios: while the norm is between 3 and 4, a significant proportion of respondents pointed to averages of 4.5 and above and over 50% believed that ratios will increase over the coming 12 months.

When it comes to arranging debt packages, flexibility to do M&A was the top consideration over the past 12 months, chosen by 56% of respondents. And this trend shows no sign of abating – in the coming year, 49% of respondents considered flexibility to do M&A as their top priority when securing finance.

“With more options than ever for financing deals and terms increasingly favouring borrowers, more than half of our respondents expect leverage to increase,” says Nicholas Smith-Saville, Senior Analyst at Debtwire. “Respondents also put flexibility to do M&A at the top of their priority lists, likely setting the stage for buy and build strategies over the coming 12 – 18 months.”

For the report, Debtwire surveyed 150 individuals at private equity firms based in Europe on behalf of Travers Smith. Respondents were split evenly (30 each) between firms that generally make investments of less than €75m, €75-€249m, €250-€749m, €750m-€1.5bn and over €1.5bn. The survey asked respondents to provide details of all deals of this size that they had worked on over the past 12 months and in total is built on information pertaining to 461 deals.

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