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European leveraged loan participants eye 2021 LBO surge, once markets stabilize

Capital Markets View – February 2021

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European leveraged loan participants eye 2021 LBO surge, once markets stabilize

Leveraged loan market participants are expecting an increase in the volume of European LBO financings in 2021, as the volatility that has battered acquisition opportunities and investor appetite for much of this year eases. With the impact of the COVID-19 pandemic, European leveraged loan market volume to support LBO activity in the year to end-November fell more than 20% from the same period in 2019, according to LCD, but those in the loan asset class are optimistic about the outlook for 2021.

“We’re expecting a pick-up in buyouts in 2021,” said one head of sponsors. “There were lots of auctions that were pulled earlier this year that may come back. It won’t all come rushing back on January 1 though, as we’ll need a bit of stability first. But once the vaccine rollout is done, Brexit is done, and we’re finished with lockdowns, then we’ll see a good step-up in buyouts. That may not be until April or May, but it will be a good year.”

Already, the pipeline of visible leveraged loan-backed financings expected for 2021 includes some sizeable LBO transactions being readied for launch.

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Success breeds success
The successful announcement of these buyouts in the latter half of 2020 is only likely to pave the way for more transactions. “Success breeds success,” said one senior banker. “When you shut down the M&A machine because there is no confidence, the system then takes a while to restart. But we’re seeing that confidence return, and deals are getting done again.”

Auction activity is now expected to pick up as sponsors look to make up for lost time, having faced a frustrating year for both acquiring new assets and disposing of existing portfolio holdings. “Sponsors haven’t sold as many assets this year as they’d like, and there’s a lot of dry powder available out there,” said one senior banker.

Indeed, although sponsors have had to spend some of their capital this year supporting existing portfolio firms, they still have plenty of appetite and capacity, and market estimates have between $1.5 trillion and $1.7 trillion of dry powder available globally for sponsors to put to work.

What a carve-out
Back in March, some market participants had been hopeful that tumbling stock prices would provide an opportunity for sponsors to put some of that dry powder to work to snap up undervalued assets in public-to-private transactions. As share prices recovered swiftly into April and May though, this option became less attractive. Indeed, of all the buyout financings brought to market this year, only eight were used to back take-private deals.

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However, predictions that volatility due to COVID-19 would trigger large corporates to increase their focus on their key activities by carving-out assets have proved more accurate. The latter half of 2020 has seen the Issa brothers and TDR Capital buy U.K. supermarket chain ASDA as it was spun out of Walmart, and Carlyle carve-out Flender, which manufactures mechanical and electrical drive systems, from Siemens. Both these transactions are expected to launch to the financing markets in the New Year, as is the $4.5 billion financing backing the takeover of BP's Petrochemical business by INEOS Styrolution Group GmbH.

Alongside those deals that are already expected, more corporate carve-out transactions could be on the way, with sale processes for Philips’ appliances business, Clariant’s pigments division, and Unilever’s tea business all said to be being looked at. Elsewhere, French train operator SNCF is looking to sell its leasing business Ermewa, while French utility firm Englie is looking to dispose of its 40% stake in engineering firm GTT and spin-off its client-solutions business.

“In some ways COVID-19 will have helped accelerate processes,” said one banker. “Firms’ digitalisation, automation and moves to commit to ESG have been accelerated by the pandemic, while firms that have had to trim operations and focus their energy on key areas will have done it this year.”

Moreover, sources suggest that as sponsors look to dispose of assets that they have been forced to hold for longer than they expected, there’ll be a pick-up in secondary buyouts next year.

Volume dip in 2020
Looking at this year's volume in the European leveraged loan market, some €20.25 billion of issuance in the first 11 months of 2020 was used to support leveraged buyouts — down from €26.31 billion in the same period in 2019, and the lowest volume for this time-frame since 2015. Roughly 32% of European loan issuance this year has been used to back buyouts, while the overall European leveraged loan volume to November 2020 is also down on the year-ago period, to €63.52 billion from €80.33 billion.

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In the high-yield bond market, however, these trends are reversed. In this asset class the absolute volume of buyout-related issuance has risen year-on-year, to €4.6 billion in the year to November, from €4.1 billion in the same period in 2019. Overall high-yield bond issuance is up in 2020, at €78.2 billion, making it the busiest year for bonds sold into Europe since 2017.