U.S. Buyside Invasion Meets Shrugs In Europe
The increased presence of U.S. buyside shops in Europe is expected to expand deal sizes and goose the secondary market, but the jury is still out on the long-term impact of the new players.
The increased presence of U.S. buyside shops in Europe is expected to expand deal sizes and goose the secondary market, but the jury is still out on the long-term impact of the new players. Most investors and bankers agree that more players should help financial sponsors make big ticket plays, but there is some question as to how important the U.S. imports will be.
What is not debatable is that people are moving into London. Credit Suisse First Boston's Leveraged Investments Group (LIG), a part of CSFB's Alternative Capital Division is setting up a London shop to manage leveraged loans, mezzanine debt and high-yield bonds. Highland Capital Management finalized its acquisition of ING Capital Management's (ICM) European loan business from ING Wholesale Banking in early April. The Carlyle Group completed its first European CLO in March and Babson Capital Management has become a major presence following the acquisition of Duke Street Capital Debt Management. Most recently GoldenTree Asset Management said it would be opening a London office in June.
Matthew Craston, joint head of leveraged loans at European Credit Management (ECM), said the new investors will bring more liquidity, which may help larger deals get done by providing more paper. "I think increased liquidity is increasing the scope of what can be achieved in terms of deal size," he said. Paul Sennett, managing director, syndicated loans at Deutsche Bank in London, agreed. "Because it is extra money, bigger deals will get done more easily," he explained. "Some transatlantic deals, some are euro deals with a number of transactions in the $4-8 billion total facility size -- the arrival of an extra, shall we say $500-700 million of buyer power, that's what we think it adds."
That buying power is being picked up on by financial sponsors, said Mike Ramsay, managing director, Carlyle European leveraged finance. "The greatest influence [of US investors] has been seen in the acceptance by financial sponsors that liquidity in their syndicates are a necessary fact of life to enable them to access the wider loan and capital market underwriters in their even greater sized LBOs," he said.
But Herman Guelovani, portfolio manager of NIBCapital Bank, has a slightly different take. He thinks more liquidity is actually leaving the market than coming in because speculative liquidity is disappearing. "In the recent couple of weeks, we have lost a lot of liquidity from the European market," he said. He cited hedge funds and carry traders, as well as some U.S. funds that are refocusing back on the U.S. market. Of the new U.S. firms, he noted that two, Highland and Babson, are more or less replacing existing European shops, not bringing in new money. "There will be an increase in players with some new U.S. firms in Europe, new CDOs from existing managers that will be replacing older funds and maybe a couple of more European banks, which will launch funds," he said. "Whether that will be commensurate with the rapid growth in the European leveraged loan market - remains to be seen."
One U.S. buysider who participates in the European market, said he expects a more active secondary market on both the par and distressed sides. He also said pricing, which can be somewhat standard at LIBOR plus 2 1/4%, 2 3/4% and 3 1/4% on term "A," "B" and "C" loans in Europe, will become more flexible. ECM's Craston agreed pricing will become more flexible, but he was not convinced an increase in U.S. players would be the catalyst. "I think increased institutional involvement will lead, over time, to more differentiated pricing, but that institutional involvement could come from the US or not," said Craston at ECM. "I wouldn't say that was a U.S. feature, but it's a feature of more institutional buyers and less bank buyers." He said banks are still hungry to participate in leveraged loans and estimates they make up about 65% of the buyers in Europe.