DLA Piper report reveals dramatically changing market landscape

DLA Piper’s 2014 European Acquisition Finance Debt Report has revealed that the market landscape is changing dramatically as a result of an increase in liquidity and the rapid influx of alternative sources of capital offering new products.

The report polled more than 250 debt providers, advisers, sponsors and corporates active in the European debt markets.

The outlook for the European acquisition finance debt market looks much healthier than 12 months ago, with 70 per cent of survey respondents expecting deal activity to increase this year, compared with 51 per cent of respondents to last year’s survey.

Combined with the gradually improving liquidity among traditional lenders, sponsors now have access to a more diverse array of finance providers such as private debt funds, bond funds and institutional investors offering a range of different structures.

Private debt funds have had a profound impact on the European market, participating in more than 50 deals in 2013, a significant increase on 2012. Given the sheer volume of private debt funds raised and in the pipeline — more than 30 have either raised money or are in the process of doing so, according to fund managers interviewed for the survey — this trend is set to accelerate in 2014.

As a result, 71 per cent of this year’s survey respondents expect their acquisition finance lending targets to increase in 2014. This is creating new challenges and opportunities for traditional lenders. However, according to bankers interviewed for the survey, the presence of alternative lenders is not a long-term given.

Almost one third of survey respondents (28 per cent) are expecting unitranche structures, which combine senior and subordinated debt, pricing and risk into one debt instrument, to be the most common non-bank acquisition finance debt structure in 2014. The appeal of unitranche is clear, offering higher leverage, larger hold sizes, low amortisation and greater flexibility. Yet it is not without its drawbacks — as interviewees revealed, there is some uncertainty in the sponsor community over how private debt funds will approach a business in distress.

As a result of the greater liquidity, margins and arrangement fees have reduced significantly in the past 12 months. In 2014, the increasingly competitive market environment is expected to lead to more aggression in pricing and leverage: 60 per cent of respondents expect senior debt arrangement fees to be less than four per cent this year, up from 11 per cent of respondents in 2013, with 23 per cent expecting leverage to be more than 4x, up from 16 per cent last year and one per cent in 2012.