Thu 12/17/2020 08:24 AM
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GCA Altium Report

The European private credit market staged a recovery in the third and fourth quarter of this year after debt issuance stopped altogether during the Covid-19-related lockdown in the quarter ended June. Despite the uncertain economic outlook going into 2021, investors whose portfolio might have been challenged in 2020, are focusing on the pipeline as they expect higher new deal activity, sources told Reorg. Continue reading for the EMEA Middle Market by Reorg team's update on the European private credit market in 2020, and request a trial for our editorial coverage of  the European credit market as we move into 2021. 

According to data compiled by GCA Altium, total deal count fell 30% between the first quarter of the year and the second. While some countries implemented lockdown measures in March, the second-quarter reflects the brunt of the impact the pandemic had on the economy and deal flow.

(Source: GCA Altium)

After activity declined in the second quarter, and as investors assessed their portfolio, new deals started increasing again in the third quarter. This was supported by various government schemes and central banks' efforts to keep markets going. For mid-market some of the solutions also came in the shape of preferred equity provided to companies to support PE investments.

“Private debt lenders are extremely busy right now. Amid the Covid-19 pandemic and weak bank lending private equity sponsors prefer dealing with direct lenders rather than banks,” Robin Doumar, managing partner at Park Square Capital told Reorg.

Reflecting a certain investor caution after a volatile year, there has been an increasing number of deals for companies which are market leaders in their sectors and generate attractive cash flow, direct lenders said. Sectors, such as healthcare, software, business services or infrastructure benefited from the Covid-19-pandemic related crisis.

Borrowers matching this definition of a strong credit included Dutch fire protection company SK FireSafety which was put for sale in August and was acquired by U.S.-based safety company APi Group in October, or German medical workwear retailer 7days Jobwear, which was acquired by Chequers and Paragon Partners in November. The latter attracted banks as well as direct lenders and was at the center of a competitive bidding battle for weeks, typical of many deals this year.

“There are currently more quality assets in the market. But that is a normal pattern that we saw during the great financial crisis. Investors are expecting investments only in good quality credits at the moment,” Nicole Downer, managing partner and head of investor relations at MV Credit said.

Pricing for companies in Covid-19-resilient sectors such as healthcare, financial services and software was in the range of 600 bps to 650 bps in the first half of the year, according to Deloitte’s latest Alternative Lending Deal Tracker, or ALDT, report. In April, EQT acquired German hygiene and infection prevention solutions provider Schülke backed by a €350 million unitranche at 650 bps provided by HPS and MV Credit.

In the second half of the year, KKR’s acquisition of U.K. HR services company Citation was backed by a €250 million unitranche at 6.3x leverage. Part of the structure was a term loan B, which was priced at 625 bps, as reported.

In another display of investor caution, leverage levels have decreased from an average of 5.5x to 6x at the start of the year, before the coronavirus crisis, to about 5x to 5.5x, according to direct lenders. In some cases, bank lenders involved in the debt financing requested borrowers to delever to reduce risks and improve the lenders’ risk profile, market participants said.

The U.K., Europe’s biggest direct lending market, led the deal recovery with 20 transactions completed in the third quarter, up by eight compared with the previous quarter when deals in the pipeline were put on hold, GCA Altium data shows. The prospect of Brexit also made the necessity to close deals more urgent. In contrast, other European regions improved their deal flow only slightly in the third quarter.

In terms of geographies; Germany, France, Benelux, and the U.K. have seen an increasing volume of activity in the second half of the year. In terms of deal activity, Germany was the busiest single region in Europe this year, Park Square Capital’s Doumar said.

Some of the transactions Reorg has covered are German med-tech Windstar which received a €110 million unitranche at leverage of 5.3x from Pemberton to support Oakley’s acquisition. Eurazeo’s acquisition of French cleaning products Altair Group which was supported by a financing package with leverage levels in the range of 5.5x to 5.75x and a marketed EBITDA of €20 million. U.K’s Cloud business Babble’s acquisition by Graphite Capital which was supported by a €35 million term loan at just under 4x leverage provided by Apera. IK Investment Partners’ acquisition of Belgian software GeoDynamics was supported by a financing package at 6.5x leverage provided by Arcmont Asset Management. Marketed EBITDA of Geodynamics was €8 million.

Direct lending’s signature debt structure, unitranche became a good way for funds to deploy capital in large amounts per deal. Ares provided a £1.575 billion unitranche to U.K. insurance broker Ardonagh in June.

Some banks struggled to keep up with funds in participating in unitranches. Traditional lenders exposed to the middle market had to delever their portfolios given the Covid-19 pandemic-related high default risk. Debt funds jumped in to take over the whole unitranche debt, and even more so in riskier credits. In October, Partners Group became sole lender to U.K. restaurant chain Cote Restaurants, not only providing a £150 million unitranche but also acquiring the £10 million RCF line from HSBC, as Reorg reported.

Looking Ahead

Despite renewed concerns across Europe and restrictions continuing to apply in relation to the virus as of the end of December, market participants have started to price in positive developments such as the impact of vaccines to battle Covid-19 and end the pandemic.

“Loan markets have strengthened significantly following positive news in relation to the vaccine,” Andrew Cruickshank, director in Advisory Corporate Finance at Deloitte said. “This optimism can also be seen in the secondary market, where the average flow name bid is now much closer to par, or about 99 as of today.”

According to Cruickshank, deal pipelines across the syndicated and private markets are filling quickly on the back of this optimism and there is significant pent-up demand across the lending community to meet this new supply of deals.

“We will see more new financings from larger issuers in the new year,” Francois Decoeur, managing director and member of the investment team at MV Credit, said.

Private debt managers do not expect a major upheaval of existing operations because of Brexit since, although there may be some regulatory changes that drive the need for more ‘boots on the ground,’ managers already work to individual regimes when lending into European geographies.

“It is not a concern for us as we are resilient. We have been preparing for the United Kingdom leaving the European Union since the vote,” MV Credit’s Downer said.

A snapshot of some mid-market deals Reorg is tracking for the stat of 2021 is below:

Deal Pipeline

  • BouWatch: Dutch Nordian capital-owned security surveillance BouWatch has appointed Houlihan Lockey for a sale which is expected to start next year.

  • Utimaco: German cybersecurity company, owned by EQT, is expected to come to market next year.

  • Canyon Bicycles: German bikes manufacturer acquired by Groupe Bruxelles Lambert recently. A financing to support the acquisition is expected next year.

  • Infoniqa: Austrian software, which was acquired by private equity firm Warburg Pincus this year is expecting a refinancing in 2021.

  • Lagarrigue: French orthopedic equipment, owned by Ardian, is expecting to resume a sale next year.

  • Aroma Zone: French natural products retailer has appointed Societe Generale as financial advisor to come to market.

  • Sustainable Agro Solutions SA: Spanish fertilizer business has appointed KPMG and is undergoing a sale process.

Disclosure: Funds associated with Warburg Pincus hold a majority interest in the parent company of Reorg Research Inc.
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