The DLA Piper European Acquisition Finance Debt Report 2015, which polled more than 300 debt providers, advisors, sponsors and corporates active in the European debt markets, has revealed that in the last year the wall of refinancing has passed and the market has become increasingly competitive.
At the beginning of 2015, the outlook for the European acquisition finance debt market this year is optimistic. According to the survey data the high level of deal activity recorded last year looks set to be maintained in 2015 – 94% of respondents expect 2015 to be either more active than last year or at least similar in activity to 2014.
Notably, for the first time in three years, survey respondents predict more traditional management buyouts (20%) in 2015 than refinancing transactions (18%). During 2014, there was an increase in primary deal activity which interviewees ascribed to improved economic confidence and an increase in liquidity.
The most profound change to the market during 2014 was the intensification of competition between lenders and debt products; 84% of respondents believe competition between lenders increased and 81% believe competition between debt products was more pronounced.
A prominent theme of last year's report was an expectation that private debt funds and alternative lenders would start to dominate the acquisition finance debt market. However, during the first half of 2014 the banks fought back by offering higher leverage, lower pricing and in some cases looser terms than they have done previously. In addition, there was also an increase in collaboration between banks and funds through joint ventures or agreeing heads of terms, and in some cases more detailed longer form documentation, to enable them to move quickly in the event of collaboration on a deal.
Greater competition in the market has resulted in a reduction on loan margins and arrangement fees. The majority (54%) of banks and alternative lender survey respondents plan to increase their acquisition finance lending targets in 2015 and new lending funds are coming to the market which will put pressure on loan pricing and margins in 2015. Over 80% of respondents expect the typical senior term loan A margin to be below 4% in 2015, a marked increase on the 60% expecting sub-4% margins in last year's survey, and 11% in 2013.
Pressure on arrangement fees also looks set to intensify in 2015 - the majority (73%) of respondents expect the typical senior dent arrangement fee to be below 3.75% in 2015, a significant increase on the 50% predicting sub-3.75% fees last year.
2014 was a record year for high-yield but it proved to be a mixed year with issuance much stronger in the first half of the year than the second. According to Dealogic data, some 55 bonds valued at €50 billion were issued in Europe to fund acquisition or refinance acquisition debt in 2014, a 15% increase on the numbers of bonds issued in 2013, and an increase of over 150% in value on the 48 acquisition-related bonds totalling €20 billion issued in 2013.
Survey data indicates that 2015 may be a challenging year for high-yield - 23% of respondents expect it to be the most common non-bank acquisition finance debt structure in 2015, making it the anticipated third most common dropping from being expected to be the most common two years ago. However, interviewees suggest a cautious optimism for the market based on 2014 being a record year and a promising start to 2015.
Alexander Griffith, Debt Finance partner at DLA Piper, commented: "Last year's report anticipated that private debt funds would dominate the market by the end of 2014. However, this hasn’t actually materialised and this year's survey has shown a real intensification of competition between lenders as banks have fought to keep a share of the market. If the credit is strong, banks will increase their leverage capacity aggressively, price debt relatively cheaper than where funds can get to and retain the credit. Funds come into their own when the credit isn’t as strong, or has a quirky structure and the banks just can’t get comfortable as quickly. Overall, the market remains much more competitive."
David Miles, London Head of Debt Finance at DLA Piper, added: "This survey is now in its sixth year and continues to provide a fascinating insight into the market's performance and predictions for the year ahead. At the outset of 2015, a promising increase in liquidity and primary deal activity suggests this will be another strong year for the acquisition finance debt market."
The report can be downloaded here.