Markets look beyond banks to tackle €550bn debt wall

Both borrowers and lenders expect bond markets, private equity houses and other alternative sources of capital to play an increasing role in reducing Europe’s maturing mountain of LBO debt.

Borrowers and lenders expect high yield bond markets and alternative capital providers, including private equity firms, to play an increasing role in refinancing leveraged buyout debt in the coming years, according to Debtwire’s Refinancing 2012 Report.

Banks will remain a mainstay of many debt refinancing plans, said the report, but less than half of the borrowers and just over a third of the lenders surveyed expected banks to be primary providers in upcoming deals.

Almost €550 billion of European buyout loans are due to mature between 2012 and 2016, according to a Linklaters report earlier this month. 

With banks addressing their balance sheets in the face of various pressures including forthcoming regulatory changes and market volatility, private equity firms will have to look to alternative sources of financing as portfolio company debt reaches maturity.

This could however present an opportunity for private equity in the secondary market. “We are back to grassroots private equity activity. For the right sponsor with the right financial skillset and access to capital and experience, the wall of debt presents a once in a generation opportunity,” said Ian Bagshaw, a partner in Linklaters’ private equity practice.

“Market participants are beginning to factor in that European banks deleveraging to meet Basel III regulatory capital requirements and nursing heavy write-downs from peripheral bond holdings are no longer as willing or able to roll their exposures,” said Robert Schach, deputy editor of Debtwire Europe.  

European high yield bond markets, the main alternative for leveraged buyout refinancing, have reopened even to CCC-rated issuers, after a hot US market led the way in January, Debtwire said.

In the first three quarters of 2011, $56 billion of buyout refinancing was completed across Europe according to Linklaters. But amid challenging market conditions the fourth quarter saw only $700 million of refinancing.

Annual volume of refinancing required will hit nearly €140 billion in both 2014 and 2015, according to Linklaters' report.

But despite the best efforts of the European Central Bank, which has flooded the market with cheap money as part of its ‘long term refinancing operation’, conditions remain challenging.

“The crisis remains far from resolved and austerity-sapped European growth remains feeble. Sovereign concerns can easily resurface and periodically shutter markets again,” Schach said.

The Debtwire report reveals contrasting views on the changes in market conditions and the scale of upcoming maturities, with borrowers still looking complacent regarding potential volumes due for refinancing.

The financial services sector will likely represent the largest slug of debt to be refinanced, followed closely by the property and construction industry and the consumer and retail sector, respondents said.