In October, Commerzbank, Crédit Agricole and Rabobank launched syndication of 181m of senior leveraged loans backing Gilde Buy Partners takeover of German frozen good company Eismann. The margins on the term loan A and revolver were 425bp, while the term loan B offered 475bp.
Given that, in the same month, LBO loans for Bureau van Dijk and Com Hem flexed their term loan B margins up to 500bp and still had to allocate at original issue discounts (OIDs) of 94 and 93 respectively, Eismanns pricing should stick out.
But the tight pricing on the deal is hardly a surprise. While the wider levfin market has had a whirlwind 2011, building itself into a frenzy of growing leverage and reverse flexes in the first half before crashing down in the summer, the German mid-market has plodded along, helped by a supportive local bank market.
"Germany stands out from other European regions because it can still rely on retail bank liquidity," says Steffen Wasserhess, managing director in sponsor-driven loan syndication at UniCredit in Munich.
Such is the demand that competition from banks, coupled with the ancillary business opportunities from a mid-market LBO, meant margins were consistently 25bp-50bp lower than most European leveraged buy-outs before the wider market began to heat up and drove pricing down earlier in the year.
But the Eismann deal shows that, as yields have widened elsewhere, the differential between mid-market Germany and the rest of Europe is back. And importantly, this essentially bank-driven sector of the market has not got ahead of itself, leaving it apparently healthy even in these troubled times.
"Although margins may be lower, the documentation has usually been more restrictive," says Wasserhess. "The retail banks didnt follow the increasingly aggressive structures of the pan-European deals we saw in the first half of the year."
As elsewhere, LBOs in Germany that relied on fund liquidity were hit in the summer. Indeed, loans backing Blackstones takeover of outdoor clothing and equipment chain Jack Wolfskin and KKRs acquisition of telecoms operator Versatel are yet to be fully placed, having been signed in July.
"In terms of larger LBOs, there is little difference between the likes of Takko (bought by Apax using 850m of loans in January) or Jack Wolfskin in comparison to other European deals. These deals are structured for the European leveraged loan market and have the respective terms," says Wasserhess.
"Where deals become German is in the small and mid-cap markets."
These companies with German characteristics are the most interesting for buy-out firms too.
"The country has been viewed as one of the brighter areas in Europe, with underlying growth, strong export-led businesses, good technological know-how and solid market shares," says Anil Kohli, banking partner at mid-market private equity firm 3i, which bought jewellery supplier Amor in December 2010. "All that makes Germany attractive for us."
Bank bid defiant
The market has had to rebuild despite losing some of its previous stars. WestLB, for instance, has entirely withdrawn from leveraged loans.
But in consequence other players have increased their market share, with market participants pointing to the likes of DZ Bank as being more visible in the leveraged finance space than before. DZ participated or was a bookrunner in 11 German transactions in the first three quarters of 2011, according DC Partners Mid Market Monitor more than any other bank.
After recovering from its double bail-out in 2007 and 2008, IKB Deutsche Industriebank re-entered leveraged finance, beginning to rebuild its business in September 2009.
"Germany recovered quickly from its recession and a lot of German and foreign banks have remained active in the leveraged finance market, so underwriting can be attractive here, even in the mid-market," says Torsten Aul, head of syndicate at IKB.
And although caution is understandably the order of the day, bankers see little sign of a retraction in lending from the retail banks.
"At the moment there is more of a tendency to do these small and mid-cap deals as clubs," says Thorsten Gladiator, head of German origination group at Commerzbank, "but we have not seen German banks pulling back from lending at all based on current macroeconomic issues."
As of November at least, therefore, the German mid-cap LBO market is still open for deals, with the auction of healthcare group Ameos among the processes being worked on.
"The deal pipeline is still there at the lower end of the market," says Commerzbanks Gladiator. "Before the summer we would have expected a slowdown, but there are still three or four deals out there now and for those deals lenders appear quite comfortable."
But the great unknown remains the fallout of the eurozone crisis, and bankers are well aware that even the steadiest of market segments are vulnerable.
"Even after the volatility of the summer, banks are signalling a willingness to commit to new transactions," says 3is Kohli. "That said, the elephant in the room remains the eurozone crisis and its impact on banks lending capacity."
So while it is a case of so far, so good for lower end of the German LBO market, few can make predictions about market capacity.
"Funding costs have increased and banks are getting more cautious," says IKBs Aul. "We will have to see what effect that has on their attitude to leveraged lending."