European traders face reduced debt options as recession risk looms


* M&A financing is considered more expensive and harder to access

* Investors flee the junk bond market amid monetary tightening

* Riskier debt sales down 77% year-to-date

* Morrisons underwriters take a hit – source

* Private lenders are stepping in with a slight increase in hybrid financing

LONDON, May 16 (Reuters) – European dealmakers are struggling to fund corporate takeovers as fears the region’s economies could plunge into recession prompts bond investors to demand bigger rewards for the risks they face. they take to make deals.

Global economic uncertainty and market volatility triggered by the Russian-Ukrainian war, coupled with monetary tightening by the Federal Reserve and the Bank of England and expectations that the European Central Bank will follow, have made transaction financing more expensive and harder to access, bankers and analysts said. say.

More than $390 billion in M&A deals have been announced in Europe since January, up from $365 billion in the same period last year – nearly doubling 2019 volumes of $199 billion in the same window pre-pandemic, according to Refinitiv data.

While banks have agreed to provide the necessary financing, some are having to ease the terms to find lenders willing to take on some of their debt.

“There are many variables in the market and investors will be cautious until they stabilize and the gap between supply and demand narrows, particularly in Europe,” said Anthony Diamandakis, co – Global Head of Citi’s Global Asset Manager Franchise.

“We don’t see a lot of new debt commitments at the moment as M&A deal volume looks light.”

Yields on global corporate debt have climbed nearly 200 basis points on average this year. Those on euro-denominated high-yield bonds doubled to 5.5%, according to the ICE BofA indices.

Dealers say the fight for funding hasn’t marked a death sentence for new deals, and while M&A volumes are currently subdued, they could still pick up later this year.

But in the meantime, some debt sales have run into trouble.

In Britain, the most notable deal to have run into trouble was the £7 billion ($8.6 billion) takeover of supermarket chain Morissons by US buyout fund CD&R, the syndication of its pile of debts having been delayed for about six months.

The major banks that have fully assumed Morrisons’ financing now find themselves with more than £3bn of debt to syndicate, a source familiar with the talks said.

Banks – Goldman Sachs, BNP Paribas, Bank of America and Mizuho – had to place some of its debt worth around £1billion at a discount of around 10% to be able to sell it to private lenders , the source said.

Goldman Sachs and CD&R declined to comment while Morrisons and the other banks were not immediately available.

M&A financing packages are usually taken out months in advance. Investment banks guarantee a certain interest rate to potential buyers, but also include so-called “flexible” provisions in the terms of the agreement allowing them to adjust the final price by a certain amount if the markets move significantly.

If these are not enough to cover rising market rates, the debt is syndicated at deep discounts, with banks making up the difference, which can result in a loss if it exceeds their fees.


Leveraged buyouts have come under increasing scrutiny after the financial crisis, as they are usually financed by loading a large amount of debt on the target company relative to its assets.

Due to their high leverage ratio, they often involve the issuance of lower quality high yield bonds, often referred to as junk bonds because they carry a higher risk of default.

But silver is fleeing the asset class this year; European high-yield retail funds suffered $20 billion outflows, or 6% of assets under management, according to BofA citing EPFR data.

“A lot of fixed rate high yield investors have cash today but are worried about cash outflows. As long as this worry persists, it will be difficult to price new large trades,” said Daniel Rudnicki. Schlumberger, Head of EMEA Leveraged Finance at JP Morgan.

Global high-yield bond issuance is down 77% year-to-date, according to data from Refinitiv, with European volumes down nearly 75% from a year ago.

After a 10-week shutdown of the European high yield market, the longest since 2009, a pool of banks led by HSBC and Barclays launched an £815m bond sale in April to fund Apollo’s takeover of the builder British Miller Homes.

A sterling tranche was offered at a deeply discounted price of 93.45 cents to attract investors, with banks also offering a higher yield than quoted at the start of marketing, a lead manager said.

HSBC declined to comment as Barclays and Apollo were not immediately available.

Similarly, French private equity firm Ardian opted for a junk bond to finance its 1.1 billion euro ($1.2 billion) purchase of Italian pharmaceutical company Biofarma Group on May 6.

BNP Paribas and Nomura arranged a €345m floating rate bond to fund the Biofarma takeover and ended up offering a deep discount and tighter investor protections in bond documentation to push through the deal , a document seen by Reuters shows.

Nomura declined to comment while BNP Paribas and Ardian were not immediately available for comment.

Buyout fund CVC Capital Partners’ foray into a major European soccer league has also struggled as the private equity firm funded a €1.99 billion investment in Spain’s La Liga through an 850 million euro bond sale.

Goldman Sachs, which led the bond sale, had to offer steep discounts on both tranches, according to an agreement document seen by Reuters. CVC and Goldman Sachs declined to comment.

While most M&A financing is directed to the leveraged loan market, which has held up better than junk bonds, with floating rates offering investors protection against rising rates, loan sales have also slowed down. Negotiators say banks have become more selective in financing transactions.

“You want to have a clear understanding of any transmission issues like energy exposure or a potential drop in consumer demand,” said Simon Francis, head of debt financing for EMEA at Citi.

“It’s about making sure you understand how performance will be affected by what’s happening around the world.”


Private lenders such as Ares, Blackstone and KKR are trying to fill the void by charging higher interest rates to provide cash to potential buyers and salvage their deals, bankers and investors say.

The trend has accelerated since Russia invaded Ukraine on February 24.

“Any core funding agreed by the banks before the war in Ukraine will likely have to be reassessed,” Francis said.

This year, US private equity firm Thoma Bravo has repeatedly bypassed traditional banks and turned to a group of private lenders, including Owl Rock Capital, Blackstone, Apollo Global and Golub Capital, to finance the purchase. of $10.7 billion from enterprise software company Anaplan in March.

The U.S. tech-focused investment firm continued to use Golub, Blackstone and Owl Rock in April to fund the $6.9 billion takeover of New York-listed cybersecurity firm SailPoint Technologies.

In Europe, private lenders have mainly operated under so-called hybrid arrangements, where funding comes from both private and public markets.

Chris Munro, head of global leveraged finance at BofA, said a number of upcoming financings could be backed by hybrid structures.

“Banks are still open for business and underwriting deals, it’s just the terms that have changed and the structures are a bit more conservative,” he said.

Still, with banks growing wary, private credit funds are expected to extend their gains.

“We’re moving into a mix and match phase. Private equity funds are going to be very creative around some of their financings,” Citi’s Francis said.

($1 = 0.8085 pounds)

($1 = 0.9605 euros)

(Reporting by Pamela Barbaglia and Yoruk Bahceli, additional reporting by Andres Gonzalez; Editing by Emelia Sithole-Matarise)


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