TLDR

• LevFin M&A issuance has reached a record €78.6bn year-to-date (for an issue date up to 6 Oct) in the European market, with the skew toward loans - €52bn of leveraged loans and €27.8bn of junk bonds 
• LBOs boomed in September and early October 2021. Overall M&A-related issuance peaked in February & June for bonds, and February & July for loans
• Record M&A supply to continue in Q4: Q1 (€23.9bn), Q2 (€31.4bn) and Q3 (€23.3bn) but the trend could be headed downhill from there. Chunky pipeline ahead with 33 M&A deals to close in Q4 and in early 2022
• Valuations and leverage remain elevated, while equity contributions (%) trim slightly to an average of 49%
  

European M&A Issuance - More is More

The autumn wave is finally here, and M&A transactions continue to dominate the European leveraged finance space with a record year-to-date supply of €78.6bn (as of 6 Oct 21). For reference, 9fin data shows this year’s cumulative HY bond and lev loans issuance reached €228.4bn year-to-date (excl. USD), with M&A accounting for ~34%. 

“Sponsors are flush with cash and are heavily pushing companies to expand into new regions or consolidate their positioning through M&A - there’s a taste of opportunism with many deals this year, you get the sense it's really the sponsor behind them, though I expect that to taper off,” said one buysider. 

This year started with relatively low activity, and immediately picked up in February for both loans and bonds. 2021 has already surpassed both 2019 and 2020, with 59% and 55% more M&A-related issuance, respectively, following the accelerating trend of the wider market. This trend has also primarily been driven by loans. Indeed, buysiders are already swept off their feet this autumn, often declining deals due to their sheer workload.

In retrospect, 2020’s bond issuers postponed most deals to early July, feeding just under €6bn (equiv.), in a principal amount of notes, that month only. However, supply did not fully recover for the remainder of the year. The 2021 M&A pipeline promised barnstorming issuance, and year to date activity has not disappointed. Issuance peaked in February and June with €6,700m and €4,500m, respectively.

On the other hand, loan issuers kept investors busy during the second half of 2020, and this year they’re again proving popular among strategic buyers and private equity firms looking to fund acquisitions. A blowout sale of €7,600m and €10,600m of euro-denominated lev loans took place in February and July 2021, respectively.

Unsurprisingly, one of the largest deals attracted the most attention this autumn. A second buysider said they were most excited about Medline over any other deal coming to market in Q3, with several buysiders agreeing everyone wanted a piece of it. “It’s market-defining,” the second buysider said. 

The business was valued at more than $32,000m (13.9x) in an LBO by a consortium of Hellman & Friedman, Blackstone and Carlyle. Medline graced the European lev loans market with a €500m TLB, while the remainder of the financing was arranged in US dollars and included $7,000m of SSNs/SUNs and a $7,270m loan. 

Autumn LBO boom - Super Mario

Size is important too, with 26 issuers in 2021 posting Euro bond and loan tranches for LBOs in excess of €1,000m (equiv.). A swathe of large transactions including Asda (€4,003.2m), Cerba (€2,270m), PDA (€1,700m), Circet (€1,625m), Grifols (€1,400m), etc. arranged financing with multiple security tranches, taking advantage of investor demand for yield on the sub tranches.

Long-awaited LBO deals launched as soon as the first week of September, with early bird Yankee issuer Solenis feeding a total of €1,265m of syndicated debt (excl. USD) to the levfin market. Platinum Equity purchased the water treatment business for $6,035m including debt, at 9.8x its marketed EBITDA of $340.3m. Euro-denominated financing included €765m of high yield bonds and a €500m term loan.

Notably, Italian LBOs have contributed disproportionately to the supply momentum, which has been visible since early 2021 with TeamSystem and Pasticceria Bindi.

Two buysiders agreed this was likely due to the wider economic conditions in the country. A third buysider said: “Italian businesses are saying they’re enjoying growth through the digitalisation and modernisation of their economy under Mario Draghi. I think he’ll have a positive effect on the economy.”

To date, September and October have seen five Italian bond issuers: Itelyum, Pasubio, Arcaplanet, BIP and Eolo. A preference towards FRNs is partly due to the existing lending restrictions on foreign lenders in the country regarding loan structures. Valuations on Italian LBOs this quarter ranged from €592m (8x EBITDA) for car leather manufacturer Pasubio to €1,349m (12.5x) for telecom provider Eolo.

The third buysider has not taken part in any of these deals. “It’s not a geographical decision, it’s not like we don’t want to invest in Italy. We just didn’t find any of the deals were right for us. [But] it does seem like the economy is recovering quite well.”

Indeed, other buysiders found issues with some Italian deals, despite positive macroeconomic drivers. The third buysider said their firm killed BIP because they were concerned about cash generation. “That’s what we’re looking for as lenders and it just wasn't there,” they said.

Equity Cheques, Valuations, Add-backs

On another note, 9fin’s OM database shows that marketed net leverages in 2021 have varied from 1.8x (Synthos) to 6.9x (Birkenstock) for European M&A-related high yield. For deals with Triple CCC issues this ranged from 5.7x (Titan) to Birkenstock’s 6.9x. 

However, as we’ve discussed in our 2021 EBITDA add-backs report, marketed figures rarely represent clean leverage ratios. In 2021 HY deals, the average EBITDA add-back was 20.2%, implying an average leverage understatement of 0.85x. If we look at the ‘top 10’ deals (including, but not limited to M&A), add-backs step up to 88.6%, with a leverage impact of 3.57x. 

Our sample of 179 transactions closed from 2013 to 2021 show that, on average, leverage has remained constant at below 6x, mainly due to the EU regulation restriction on underwritten deals not exceeding the 6x mark. Valuations are still below 2019 levels (12.3x) averaging at ~11x. 

Equity cheques follow a similar trend as EV comps historically, but for 2020 and 2021 the trend seems to be going downwards, while valuations stay constant and leverage increases. 

The fourth buysider thinks a factor here is the increasing prevalence of dividend recaps. They said: “Sponsors want to get their money back and they don’t care about increasing the leverage of companies in order to have their divi recap. It's still good timing for a refinancing, rates are still low, but we are worried when there is a new issue and the company just wants to increase leverage.”

So far this year has seen 13 and 22 dividend recap deal tranches from sponsored bond and loan issuers respectively, with appearances of, among others, Bite, Picard, BUT, PHM, HSE24, Foncia, Xella, IFS, BME and Verisure, primarily as part of larger refinancing deals. 

UoP, Industries, Ratings

Use of proceeds remains skewed to LBOs in Q3, but the picture looked slightly different in the booming second quarter when company mergers took over with a 53% of total issuance compared to 47% for PE-backed acquisitions.

The pandemic-resilient healthcare industry remains an M&A favourite for 2021, with buyouts in particular driving this year’s total sector issuance of €15,900m split between €3,700m of HY and €12,200m of leveraged loans. Take-private deals including drugmaker Advanz Pharma ($846m), Swedish contract pharma business Recipharm and French drug manufacturer Cooper featured, especially in the second quarter, offering great hopes for industry consolidation and implementation of buy-and-build strategies. 

Single B-rated bonds dominated the M&A LevFin space for the third consecutive quarter, amounting to just over €15,800m of issuance year-to-date (as of 29-Sept). The popularity of double BBs in the first half of the year has faded in H2 of 2021, most likely because of steady supply from sponsored issuers marketing deals with higher leverage, even higher valuations and ambitious EBITDA figures.

The first buysider said: “There has definitely been a drop in quality this year. The issue is that PE firms have so much cash to burn at the moment that their standards, for both buyouts and then M&A with their existing portfolio companies, are slipping. They need to push the leverage envelope for their own returns and they’re bidding against each other, so standards only get worse. Some M&A deals appear to have no synergies or rationale. But because that has come alongside so much volume, it’s easy to reject the worst deals, because your plate is full anyway.”

The fourth buysider agreed, saying he had seen this trend: “There are even more issuers in the CCC category. We’re kind of worried because if the economy slows down in the coming months due to [changes in] monetary policy, we could see pressure on some sectors, for example those exposed to commodities volatility. It could be difficult for some companies with less pricing power and the potential to see margins erode. You have to be very picky about what you choose right now.” 

As expected, single B names took the spotlight in the leveraged loans, particularly in the second quarter, with top hitters from Cerba, Solera and Circet- each seeking more than €1.5bn (excl. USD). Meanwhile Q3 total issuance is unsurprisingly more than double year-on-year, at approx. €14,000m including Double BBs.

As part of our value-added coverage to subscribers, this article continues to discuss the forward pipeline and our table of expected deals. If you would like to receive this information, please fill in your details on this form.