Invesco is working withLehman Brothers on a $300 million collateralized loan obligation comprising roughly half European loan collateral and half U.S.-based collateral as larger leveraged buyouts drive bigger bank deals in the European new issue market. Invesco is still in the process of ramping up the deal and will be looking to close the transaction by the end of next month. "We are beginning to see the European [loan market] maturing. It doesn't have the size or liquidity of the U.S. market, but it has the same type of investment advantage," said Brian Mitchell, product manager at Invesco, explaining why the firm is buying up European collateral.
A banker close to the deal explained that more managers have been able to ramp up European deals because private equity funds have been supplying the European primary issue market with deals large enough to provide adequate liquidity on names. The larger bank deals allow for a "C" term loan to be carved into the structure for investors, providing spreads of at least LIBOR plus 320 basis points, mimicking pricing on U.S-based "B" tranches. The size and pricing make the deals work for CLO arbitrage structures as managers seek to capture the spread between issued liabilities and the purchased assets. Pure European deals are still tough to pull off and U.S.-based collateral is still usually needed on deals because there are not enough deals with "C" tranches to support large structures and rating agency diversification requirements, explained the banker. Mitchell agreed, citing big LBOs as a driver for loan collateral.
According to Initiative Europe, a London-based private equity information provider, average LBO deal size in Europe has increased from E171.2 million in 2000 to E212.8 million in 2001 despite a decline in overall deal volume from E64.8 billion in 2000 to E59.6 billion in 2001. Hazel Clapham, analyst at the research firm said, "Projecting forward there is no reason why the trend would change," regarding the increasingly large size of private equity deals. "It used to be that the middle market was the bread and butter. Since 1999 we have seen deals that are a billion plus," she noted. Clapham noted that many funds have doubled in size and need increased deal sizes to manage their portfolios.
| European LBO Issuance | |||
| Year | Number of Deals | Value of Deals (E billions) | Average deal size (E millions) |
| 1997 | 326 | 29.2 | 89.6 |
| 1998 | 361 | 33.6 | 92.9 |
| 1999 | 403 | 50.1 | 124.4 |
| 2000 | 378 | 64.8 | 171.2 |
| 2001 | 280 | 59.6 | 212.8 |
| provided by Initiative Europe Limited |