In a remarkably short space of time, France has become one of the most important leveraged finance markets in Europe. Dealflow has been strong this year, partly as a result of the large French companies continuing to restructure and spin off non-core businesses but also because of the high number of international private equity sponsors active in France. Toby Fildes reports.
Despite a marked slowdown in leveraged finance activity across western Europe over the past year, the French leveraged loan market continues to impress. Indeed, according to Dealogic, while primary issuance of leveraged debt (including high yield bonds) has plummeted 37% in the six months to March 2002 compared with the same period 12 months earlier, France is closing in on the UK as the single largest source of leveraged financing.
The main reason why France has become a leveraged hotspot is an M&A boom that has created a steady percolation of buy-outs, spin-offs and bolt-ons which has seeped through into the European loan market over the past two years.
"From the very early days of the euro, France has been way ahead of the curve in terms of corporate activity," says Julian van Kan, head of loan syndication and trading, EMEA and Japan, at BNP Paribas. "We had the headline deals such as Air Liquide and Elf coming out of France three years ago as well as the jumbos for France Télécom and now we are seeing the logical progression of the maturing LBO market."
Van Kan believes 2002 has been an exceptionally strong year for France. "We have all been waiting for great and wonderful things out of Germany," he says. "But while dealflow hasn't matched expectations, the potential remains very strong. Thankfully, France has been busy with a rush of well structured, well sponsored deals."
French corporates may well be ahead of their German counterparts, but they are still some way behind their UK rivals. This is not necessarily a bad thing. Whereas in the UK most FTSE 250 companies have fully embraced at least one capital market product (such as a syndicated loan or an IPO), many of the top tier French corporates remain large and cumbersome conglomerates that need to sell off non-core businesses, which is good news for the big leveraged debt players.
"There have been a lot of opportunities for restructuring in France over the past couple of years," says Tony Rhodes, head of debt finance at HSBC CCF. "However, many of the big names remain large holding companies which still have to unravel their non-core businesses. In this respect, the French corporate market is a little way behind the UK in terms of evolution and this means there should be plenty of buy-outs to come from France in the future."
One area in which the French market is beginning to show similarities to the UK is the prominence of the equity houses. Firms such as Candover, CVC, Cinven and BC Partners have been quick to establish themselves in Paris over the past three years and their hard work is beginning to pay off. French conglomerates tend to be more open to venture capitalists than their German neighbours, which have preferred to offload their non-core businesses through trade sales. "In France we have found that businesses have been sold a lot quicker than in Germany," says Vijay Rajguru, director and head of leveraged distribution at Barclays Capital. "The equity houses have made great inroads in France after laying the groundwork over the past couple of years. They are regarded as an attractive alternative to traditional trade buyers by many vendors."
Appetite for French leveraged deals has, for the most part, been excellent so far this year, allowing mandated arrangers to secure full syndicates. According to some observers, much of this liquidity has come from the local French market, where regional banks have found the temptation of lending to traditional clients at more lucrative margins too great to resist.
The head of loans at a European bank explains: "Some of them [local houses] just see the headline margin and think it is a great opportunity to continue to support a long standing relationship at significantly better terms - they don't necessarily care or understand about the change in credit quality or indeed the structure.
"Others are more sophisticated and will do some credit work to find out why exactly a borrower that once commanded pricing of 25bp all-in is now paying a 225bp-plus margin before committing to the deal."
But other bankers believe that too much emphasis has been put on the local bid. "Beyond a certain size, you need to have international pricing and structures," says Christopher Baines, managing director, head of European distribution at SG. "You cannot ignore completely the nationality of a deal when it comes to syndication, but a medium or large deal needs to have pricing and structures that will be acceptable to the international market."
Jonathan Macdonald, managing director and head of loan syndicate at UBS Warburg, agrees: "If there is a strong French angle to a particular LBO then you can appeal to the French retail bid.
"This can help to keep pricing down for small to mid-sized deals but larger transactions still require underwriting to the London market."
The development of the private equity sponsors has also created a more international flavour to LBO syndicates in France. Indeed, with UK, Scandinavian and UK equity firms increasingly active in France, they have brought with them their own bank relationships.
The Legal & General Ventures and Royal Bank of Scotland Private Equity-led LBO of Moliflor Loisirs from PPM Ventures is just one example of how diverse the French market has become. Bank of Ireland, BNP Paribas, HVB Group and Scotiabank Europe joined arrangers Credit Suisse First Boston and SG in syndication of Eu301m of debt that was priced at European levels of between 225bp and 325bp.
"The Moliflor deal generated a huge amount of coverage at the bidding stage," says Baines at SG. "Despite the unusual sector, the transaction was very heavily bid by major international equity investors as well as the international banks backing them." *