Acquisition finance debt: Day of the non-banks

The fragile refinance market is back in rude health and US-style alternative lenders are stepping up with innovative structures to sustain the recovery

After years of the European refinancing markets dragging their feet, they came back with a bang in 2013. The figures say it all – deal volume increased by more than 20 per cent. 

In 2013 there were some 367 acquisition finance debt deals executed in Europe, amounting to a value of €183bn (£151bn). That marks a 27 per cent uptick in volume on the 288 deals in 2012 which totalled a worth of €138bn.

Transactions boom

According to DLA Piper’s European Acquisition Finance Debt Report 2014, this return to health was underpinned by a flurry of refinancing transactions. There was a 35 per cent surge in the volume of these deals compared with the previous year, primarily driven by the refinancing of leveraged buyouts (LBOs) with short-term debt structures and funding arrangements agreed during the crux of the financial crisis.

Debt market

However, there was another key trend that stamped a particularly strong footprint on European markets. Step forward the rise of alternative lenders – the non-banks who offer any number of innovative structures. 

DLA Piper’s report suggests that the European acquisition finance debt market is marching down the path to a US-style funding environment. In the US non-bank lenders have accounted for the majority of corporate lending for some time. 

refin predict

As Deloitte debt advisory partner Fenton Burgin notes, “In the US probably 30 per cent of corporate capital comes from banks. In Europe, the market is 85 to 90 per cent bank-financed. But this is declining rapidly and will continue to do so in 2014 and beyond.”

So, big names in the area such as Intermediate Capital Group, Hayfin and Ares Capital are set to get even bigger, while smaller players are also poised to take a bigger bite. 

This marks a sea change compared with, say, three years ago, when realistically the only alternative to pure senior was a senior plus mezzanine structure. 

“One key theme of the report is questioning whether this trend is here to stay and the market is moving on similar lines to the US, or whether it’s just a passing trend,” says Philip Butler, DLA Piper’s UK finance head. ”The feeling is it’s here to stay.” 

high yield

High-yield command

It is also worth keeping an eye on the high-yield market, which saw record highs in 2013. A decline in returns across the pond led to a notable number of US high-yield investors turning to the European markets. In response, some 212 bonds totalling €70.4bn priced in 2013 – a notable increase on the 100 or so issued per year between 2010 and 2012.

“The record expansion of the European high-yield market has created opportunities for smaller, first-time or lower rated issuers,” notes DLA Piper structured finance partner Tony Lopez. 

For example, the private members club Soho House raised £115m through a 9.125 per cent five-year bond in October 2013. And UK debt purchaser Marlin Financial secured £150m in July via a 10.5 per cent bond, due to mature in 2020. 

So what can we expect from 2014? DLA Piper’s report suggests the markets are pointing in one direction – up. According to its survey of more than 250 debt providers, advisers, sponsors and corporates active in the European acquisition finance debt market, 70 per cent expect deal activity to increase in 2014. This should be compared with just 51 per cent last year. 

The buoyant market is likely to be driven by a continuing high number of refinancing transactions as well as an increase in M&A activity. Primary deal activity is also expected to have a bumper year thanks to the strengthening macroeconomic environment in Europe’s largest LBO markets – the UK and Germany. 

Approach with care

Of course, 2014 should be approached with cautious optimism. Greater liquidity goes hand in hand with more aggressive structures and pricing, and DLA Piper’s survey respondents expect to see further pressure on margins and pricing. That should come as no surprise – margins and arrangement fees have already shrunk significantly in the past 12 months.

The diminishing risk appetite of banks is also expected to lead to further upward pressure on senior debt leverage, while the ‘covenant-lite’ structures that have long been a feature of the US market look likely to emerge in Europe.

One thing is for sure – as the markets swing back into action, Europe is awash with challenges and opportunities.


DLA Piper viewpoint
2013: a year of new participants and products

We have seen a profound shift over the past 18 months in both the make-up of participants in the European debt finance community and the products that they offer. 

Private debt funds, bond funds and private wealth managers – alternative credit providers (ACPs) participated in over 50 debt deals in 2013. Given the sheer volumeof ACP funds raised or in the pipeline (over 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.  

During 2013, DLA Piper has been lucky enough to act for a number of the more established ACPs in the UK and continental Europe, such as Ares Capital Europe, ICG, Hayfin and HIG White Horse. We have also acted as exclusive counsel (jointly with Hogan Lovells) for ESSLP, a joint venture loan programme that has been formed between GE Capital and Ares Capital Europe. We have advised ESSLP on a number of transactions during 2013 both within the UK and across multiple European jurisdictions.

Whilst some ACPs offer senior debt products, it is clear that in 2013 the unitranche product (which combines senior and subordinated debt, pricing and risk into one debt instrument) established itself as their product of choice – almost one third of our survey respondents (28 per cent) expect unitranche to be the most common non-bank debt finance structure in 2014. The appeal to financial sponsors and borrowers of unitranche over senior or senior/mezzanine debt structures can be strong, as it normally offers higher levels of leverage, larger hold sizes per institution, low or zero amortisation and greater covenant and operational flexibility. Yet it is not without its drawbacks – as interviewees revealed, there is still some nervousness among certain sponsors over how ACP will approach a business in distress.

High-yield issuances also saw a notable increase in 2013, with some 212 bonds being issued for £70.4bn (almost double the amount issued in 2012). What is even more interesting is the fact that high-yield is no longer a structure for the larger end of the market. DLA Piper’s London high-yield team has seen new opportunities emerge for smaller, first-time or lower-rated issuers. Bonds offer an alternative to the unitranche product as they are comparable in terms of leverage, pricing and size but without covenant controls.

Alexander Griffith is a debt finance partner at DLA Piper

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DLA Piper’s European Acquisition Finance Debt Report 2014 is produced in collaboration with The Lawyer Research Service, a joint initiative between The Lawyer and VB/Research. The survey was undertaken in November and December 2013, and was completed by over 250 debt providers, advisers, sponsors and corporates across Europe.

For more information about The Lawyer Research Service, contact Ed Tillotson at or telephone  0207 970 4658


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