Germany disappoints levfin market as volumes slump

Volumes in European leveraged finance took a dive in 2019, leaving leveraged credit investors struggling to find value. A string of take-private attempts, especially in Germany, had lenders and banker salivating, but fell apart before coming to market

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New money supply in European leveraged loans has been disappointing in 2019, at net supply of €29bn, against €42bn in 2018, according to JP Morgan. Gross loan supply was €65bn, down from €79bn in 2018, and €101bn in 2017, and high yield proved even worse, despite a late surge. The CLO market, meanwhile, continued to bring new deals, worsening the technical squeeze.

“Simply put, investors needed to put cash to work in a market that wasn’t growing,” said JP Morgan. But much of this is a result of luck — if just a handful of LBOs, primarily in Germany, had swung the other way, European loan bankers might be toasting a vintage year, with net supply closer to €40bn than the €24bn recorded so far.

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Take-private deals, especially in favour for under-loved sectors this year, are always uncertain — but Germany’s take­over rules must take much of the blame. Sponsors need 75% of capital to have the effective control needed for a traditional LBO structure, including control of the board, ability to change the legal form, transfer assets, and increase or decrease capital — again, a challenge for a contested take-private transaction.

The buy-out of internet listing company Scout24 was the first to hit trouble in 2019. Bidders Blackstone and Hellman & Friedman, which owned the company before it was floated in 2015, wanted to buy it back — ideally through a full take-private, which their advisers prepared funding for but never used. 

Acknowledging the challenges in Germany, however, the pair were willing to keep it listed, writing a larger equity cheque and using a financing package that fell short of the leverage levels for a classic LBO.

Nonetheless, shareholders didn’t bite — even to the 50% level required to get a decent foothold — and a $1.96bn-equivalent of new leveraged credit supply fell by the wayside. 

Roll forward to the summer, and Metro AG, one of the largest basic goods chains in Germany, was in play. Czech and Slovak entrepreneurs Daniel Kretínský and Patrik Tkác had lined up a financing package featuring more than €3bn of drawn leveraged loans for their €5.8bn offer.

Lighting manufacturer Osram, spun off from Siemens in 2013, and Bayer’s Animal Health unit also tantalised bankers and investors with chunky buy-outs — Osram’s board accepted a €4bn offer for 70% from Carlyle and Bain, before Austrian trade buyer AMS dived in with a higher bid. AMS fell foul of the same takeover issues that sunk Scout, with the 51% take-up for its tender proving inadequate to take control. 

Bayer Animal Health, meanwhile, a spinout from Bayer, had private equity firms jockeying for position during the summer, hoping to win a deal whose value was talked up to about $8bn — likely to come with enough euro leveraged loan supply to ease investors’ issues around spending their cash. But the deal instead went to US trade buyer Elanco. The $5bn or so of debt expected to be issued by Elanco is still welcome supply for credit investors (the deal will take it from around four times levered to six times) but will probably lean more heavily on dollars than if a sponsor had won a standalone trade.

Still in play is another giant German deal — ThyssenKrupp’s spinout of its lifts business. By late November, private equity groups including Blackstone, Carlyle, Advent, and Cinven were in the running, alongside partners such as Abu Dhabi Investment Authority and CPPIB. 

But the deal could still end up in the arms of Kone, a trade buyer from Finland, if European competition authorities bless the tie-up.

By its nature, M&A is always uncertain. Banks back bidders with financing, hoping they choose the right horse and get paid. But whichever sponsor wins a deal, leveraged credit investors hope they have the chance to participate in the syndication. But 2019, unfortunately, saw too many slip-ups. Here’s to a stronger 2020.   GC