Mark Vickers: Countdown to 2008

Mark Vickers, law firm Ashurst's debt specialist, talks frankly about the challenges ahead in the final week of PEO's Countdown to 2008.

Mark Vickers

“2008 is undoubtedly going to be a challenging year for the leveraged buyout market, particularly for jumbo leveraged loans.  The leveraged loan supply overhang in Europe is estimated to be just over €80 billion.  Banks have been reluctant to bring the overhang to market because of the impact on general secondary debt pricing and also the benchmarking effect on marking to market.  Until these problems have flushed through the market, lending sentiment will be skittish, and liquidity in the market will remain constrained.

However, all is not doom and gloom.  New deals being underwritten will need to be structured more conservatively, with higher margins reflecting an inevitable re-pricing of risk compared to the first half of 2007; leverage ratios will be far more sensible (bearing in mind the peak of 9.6x reached in mid- 2007 was enough to make your nose bleed).  Bullet only structures will give way to some loan amortisations (term loan A) and documentation will, once again, include sensible bank protections, as we look back with incredulity at the covenant lite deals of 2007 that barely covered the bank's modesty.

Pricing of debt will remain volatile because of thin market volumes, but should stabilise as volumes pick up.  The mid-market will recover first, but the jumbo leveraged deals will be slower to re-emerge.  Disequilibrium between the price expectations of vendors and purchasers will be slow to adjust, as vendors reject the notion that their business, trading just as profitably as it was seven to eight months ago, is now worth 30 percent. less.  For these reasons, public to privates may have a temporary resurgence, because of purchase price transparency, but target shareholder activism and the difficulties of executing PTPs may dampen already battered sponsor ardour.

Private equity liquidity has never been higher; it is estimated that $300 billion to $350 billion of private equity is available globally.  Some of this will seek out more attractive opportunities in Central and Eastern Europe and Asia. 

Returns will be lower and dependent on old-style business turnaround rather than financial engineering.  A dividend recap?  Which planet are you on?

The market corrections to debt structures and pricing will create in the longer term a more stable and sustainable leveraged finance market.  But if the current crunch deepens and becomes a default crisis then things could get much worse – then there is always the Thailand option – living on the beach for three years until all the problems have washed through the market!” Mark Vickers, partner, Ashurst

For Ashurst, like any law firm in the private equity and acquisition finance markets, 2007 has been a 'game of two halves'. That said, the firm has had a good 12 months. Turnover increased by some 28.5 percent to £275 million for the year ended 30 April 2007. Moreover, in context of more volatile market conditions, for the half-year ended 31 October 2007, revenues increased by 25 percent to £147 million.

It opened an office in Stockholm and invested in the Middle East and Asia and the firm plans to launch a new office in Abu Dhabi shortly.

Through the first half of 2007, Ashurst secured mandates such as advising Apax on the €2.85 billion 'twin track' exit of Mölnycke Health Care and Merlin Entertainments Group and the Blackstone Group on the £1.03 billion merger of Merlin with Madame Tussauds.

The second half of the year witnessed the near paralysis of the market for new jumbo leveraged loans, but its long-held strategy of aiming to be the first choice law firm for its key clients stood the firm in good stead. So in context of depressed market activity, it advised, for example, Bain Capital on the €2.2 billion offer by PPG industries to acquire SigmaKalon.