RLPC-European leveraged loan activity expected to fall in Q4
LONDON Oct 14 (Reuters) - Dealflow in the European leveraged loan market is expected to fall in the remainder of this year as a number of buyout auction processes have concluded or fallen away, banking sources said.
Lenders and private equity firms were dealt a blow last week when Dutch meat producer Vion's ingredients division was sold to US-based food business Darling International, depriving the European market of a potential 1 billion euro ($1.36 billion) financing.
"There is so much liquidity that it would have been good to see Vion in the European leveraged market. It is a definitely a loss," a senior leveraged finance banker said.
The LBO pipeline stands at 14.5 billion euros compared with 25.1 billion euros during the same period last year. The pipeline has been reduced dramatically from 37 billion euros in September as the number of auctions has tailed off. The pipeline has not been replenished, leading bankers and investors to expect a lag in activity.
"The pipeline has rarely been this thin in a market that is this great with so much liquidity," a second senior leveraged finance banker said.
Bankers are also concerned that the lack of financing opportunities will lead to more aggressive terms on the deals that do emerge, as sponsors push investors to accept tighter pricing, higher leverage ratios and fewer covenants.
The lack of M&A in 2013 has led to deal flow being dominated by refinancing and dividend recapitalisations. So far this year, 71 percent of leveraged loan activity in Europe has been refinancing-related.
"Sponsors have pruned portfolios and it is not clear if there is much else for them to do as their housekeeping is done," the second banker said.
Darling's acquisition of Vion's ingredients division highlights a potential trend of investment-grade companies acquiring non-investment-grade businesses at the expense of sponsor-backed deals.
Private equity firms are going to have to lift the price they will pay for a deal if they are going to compete against cash-rich corporates. The level of liquidity in the European leveraged finance market should give sponsors confidence that cash will be available to back the larger bids.
"This is a merger market issue, not a financing issue. There are rumblings of increased corporate M&A and the market can expect to see more investment-grade companies buying out non-investment-grade companies such as Darling's acquisition of Vion. Sponsors are going to have to increase offers if they are going to compete," the second banker said. ($1 = 0.7373 euros) (Editing by Christopher Mangham)
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