Yoruk Bahceli and Pamela Barbaglia

LONDON (Reuters – European dealmakers struggle to finance corporate takeovers. Fears that regional economies could fall into recession are prompting debt investors and lenders to ask for higher returns in return.

Bankers and analysts agree that deal financing is more expensive and less accessible because of global economic uncertainty, market volatility, tightening by the Federal Reserve and Bank of England, and expectations of the European Central Bank following suit.

More than $390 billion worth of M&A deals have been announced in Europe since January compared to $365 billion in the same period last year – almost doubling 2019 volumes of $199 billion in the same pre-pandemic window, according to Refinitiv data.

Banks have been willing to lend the money, but some lenders are looking for ways to make it more attractive.

Anthony Diamandakis (global co-head Citi’s global asset managers franchise), stated, “There are many variables on the market. Investors will be cautious until these settle.

“We are not seeing many new debt commitments at the moment because the M&A deal volume feels light.”

On average, global corporate debt yields increased by almost 200 basis points this year. According to ICE (NYSE) BofA Indexes, the yields of high-yield bond in euro have doubled and now average 5.5%

Dealmakers say the financing struggle has not marked a death sentence for new deals, and while M&A volumes are currently subdued they could still recover later this year.

However, some debt sales are in trouble.

In Britain, supermarket chain Morissons’ 7-billion-pound ($8.6 billion) takeover by U.S. buyout fund CD&R is the most notable deal to have hit a snag as the syndication of its debt pile has been delayed by about six months.

One source said that the Morrisons funding was financed by the lead banks, leaving them with over 3 billion pounds in debt.

Source said that the banks, Goldman Sachs and BNP Paribas (OTC) as well as Bank of America (NYSE), had to put a large chunk of their debt at around 1 billion pounds discount of 10% in order to be able for private lenders to purchase it.

Goldman Sachs and CD&R declined to comment while Morrisons and the other banks were not immediately available.

M&A financing packages are usually underwritten months in advance. Potential buyers are guaranteed a fixed interest rate by investment banks. However, they also have “flex” clauses in their deal terms that allow them to alter the price if the market moves significantly.

If these are insufficient to pay the rise in market rates then the debt is syndicated at steep discounts, with the banks covering the difference. This can lead to loss, if the fees exceed the loan amount.

UNDER SCRUTINY

After the financial crisis, leveraged buyouts were more scrutinized because they typically involve the transfer of significant amounts of debt to the target company in order to purchase its assets.

They are often issued non-investment-grade high yield bonds due to the high ratio of debt/equity. This is often called junk bond because of their higher default risk.

Yet, the money is fleeing from this asset class. This year, outflows to European high-yield retail funds totalled $20 billion, or 6%, according BofA data citing EPFR.

Many fixed-rate high yield investors are cash poor today but worry about future outflows. It’s difficult to price large new deals as long as this worry remains,” stated Daniel Rudnicki Schlumberger (NYSE), Head of EMEA Leveraged Finance at JPMorgan (NYSE).

Global high yield bonds issuance fell 77% in the first year of this year according to Refinitiv data. European volumes are also down by nearly 75% last year.

The European high yield markets were shut down for 10 weeks, longest period since 2009. This shutdown was led by HSBC. Barclays In April, (LON) issued a 815million pound bond to finance Apollo’s acquisition of Miller Homes in Britain.

To attract investors, the sterling tranche was sold at a steep discount of 93.45cs. The banks offered a greater yield than the initial marketing campaign, according to a leading manager.

HSBC did not respond to our request for comment. Barclays and Apollo, however, were unavailable immediately.

Ardian, the French private equity firm that specializes in French investments chose to issue a junk bonds as a way of funding its purchase of Biofarma group (Italian drug company) for 1.1 billion euros ($1.2 million).

BNP Paribas, Nomura arranged a floating-rate bond of 345 millions euro to finance Biofarma’s buyout. The document seen by Reuters shows that they both granted a substantial discount and tightened investor protections to the bond documentation.

Nomura did not comment. Ardian and BNP Paribas weren’t immediately available.

CVC Capital Partners’ attempt to buyout a European soccer league failed as well. A bond sale of 850 million euros was used by the firm to finance a 1.99-billion euro investment in Spain’s La Liga.

According to Reuters, Goldman Sachs had to offer substantial discounts for both tranches of the bond sale. CVC declined comment, as did Goldman Sachs.

While most M&A financing is slated for the leveraged loan market, which has fared better than junk bonds as floating rates offer investors protection from rising rates, loan sales have also slowed. According to dealmakers, banks are now more selective when funding transactions.

Simon Francis from Citi’s EMEA head for debt financing, said that it is important to understand any passing-through issues such as energy exposure and a drop in consumer demand.

“It is about understanding the impact of what is happening in the larger world on your performance.”

“MIX AND MATCH”

Bankers and investors believe that private lenders like Ares, Blackstone (NYSE 🙂 and KKR will try to plug the hole by raising interest rates in order to lend cash to potential buyers.

This trend is gaining momentum since Russia invaded Ukraine, Feb. 24, 2014.

Francis explained that banks will likely have to reevaluate any type of staple financing they had before the War in Ukraine.

U.S. private equity company Thoma Bravo has repeatedly bypassed banks to fund the $10.7 million purchase of software enterprise firm Enterprise Software Firm. Anaplan March, (NYSE:

In April, the U.S.-focused tech investment company used Golub Blackstone, Owl Rock and Blackstone to fund $6.9B in acquisition of SailPoint Technologies.

European private lenders have been primarily involved in so-called hybrid transactions, which are where both public and private sources of financing were used.

BofA head of global leveraged financing, Chris Munro, stated that hybrid structures are possible to back many of the upcoming financings.

He said that “Banks remain open for business” and that underwriting deals are available. But terms have changed and the structures have become more conservative.

With banks becoming more wary, private credit funds will continue to grow their wealth.

We’re now in a phase where mix and match is possible. Francis, Citizen’s spokesperson for private equity said that some financing options will become more creative by the funds.