Credit problems may be good for mezz market

Swiss asset manager Partners Group believes that mezzanine funds may benefit from the recent jitters in the credit markets.

Mezzanine lenders may be the biggest beneficiaries of problems in the leveraged buyout debt markets, according to a leading investor.
Urs Wietlisbach, from Swiss asset manager Partners Group, said recent problems in the debt markets were “good news for us, because the credit market was overheated and mezzanine margins have contracted in recent months.” He argued that the mezzanine market should pick up as cheap debt becomes less widely available. 

Already some people are talking about last Friday as “the Black Friday of the credit markets”, he said. Yet the subsequent re-pricing of debt, particularly in the senior tranches, could make the use of mezzanine more attractive, he believes.

A director at a large European mezzanine fund said that many recent deals had been underwritten with large amounts of mezzanine, but during the recent credit boom banks have re-priced much of this as senior and second lien debt. “The immediate impact of the lack of confidence in the debt markets is that this reverse flexing is not happening”, he said.

Mezzanine could fill the gap between price expectations as the banks rein in leverage, he told PEO: “It is a distinct possibility that use of mezzanine will pick up, but first we’re going to need the existing deals to come out of the system.  The real test will be what happens come September when the holiday season ends – then we’ll see if this was just a blip or something more serious.”

Despite recent imperfect conditions for mezzanine, large funds have been raised in the space. Last month, Nordic buyout firm EQT closed its latest expansion capital fund at just under €500 million ($689 million), setting a regional record, while ICG closed the biggest ever European mezzanine fund at €2.25 billion in March.

The change in investor sentiment in the debt markets is starting to have worrying consequences for Wall Street banks. According to Bloomberg, the banks are stuck with over $11 billion (€8 billion) of loans from the leveraged buyout boom that they are now struggling to sell.

However, Wietlisbach believes problems in the credit market shouldn’t hamper returns on the buyout side – as long as the economy keeps growing and the current problems “have a soft landing”, he said.