Novel Synthetic Transformations Mediated by IBX and DMP

DLA PIPEREUROPEAN ACQUISITION FINANCE DEBT REPORT 2013

Bolstered by strong balance sheets and the availability of cheap finance, the market saw more deals completed last year compared to 2011. According to four out of five respondents to our fourth annual survey, there was sufficient liquidity to get mid-market deals financed, although fewer transactions values exceeded the £150 million mark. Adverse conditions clearly continued to restrict the debt market from realising a stronger growth rate, with lenders determined to focus on the right deal.

2012 was defined by the eurozone crisis, increased regulatory constraints and a greater focus on risk. Since the start of the financial crisis, banks have been forced to shrink their balance sheets and rein in issuance, and now their long-held position as the most popular source of finance has become subject to challenge. With this trend set to continue in 2013, a growing percentage of borrowers are likely to explore alternative sources of funding, presenting non-bank lenders with an opportunity to gain a larger share of the debt market.

Many corporations and sponsors will continue to rely on bank loans for financing acquisitions, but our 2013 Report reveals the extent to which we may now be witnessing a more profound structural change in the acquisition finance market. As commercial banks continue to be challenged by the ongoing need to repair balance sheets and comply with new capital requirements, new non-bank players are stepping up to bridge the liquidity gap. The US market has of course had these characteristics for some years now.

The Report highlights the rapid rise of the private debt fund sector, expected to become a major player in the market alongside commercial banks in 2013. Equipped with the ability to react quickly to market trends and provide sponsors with additional flexibility around their capital structures, private debt funds are anticipated to further increase their market share. Many commercial banks are, however, embracing this challenge not only because they appreciate more liquidity is required in the market but also because they themselves will continue to provide super-senior facilities whilst looking at the same time to participate in private debt products.

While the risk of a major European default appears to be receding, Italian elections and Cypriot banking crisis have already generated volatility and German elections in September may fuel further uncertainty. In such a complex environment, in which each jurisdiction has its own rules and constraints and where many lenders will struggle to make progress, a strong local or sector focus will prove critical to success.

This Report, in its fourth year of production, presents detailed results of our survey questioning over 45 financial institutions active in the European lending community and offers their insights on the market for the year ahead.

EXECUTIVE SUMMARY

Philip Butler Head of UK Finance and Projects DLA Piper UK LLP T: + 44 (0)20 7796 6297 E: [email protected]

CONTENTS

1. STATE OF THE MARKET

What happened in 2012

Differing views as to the prospects for the year ahead

Appetite remains for underwriting deals

2. FINDING PROFIT IN AN ERA OF SLIM MARGINS

Sectors in favour

Secondary buyouts buck the trend

Europe’s north-south divide

UK

Germany

France

Nordic region

Southern Europe

3. BRIDGING THE LIQUIDITY GAP

Bank reservations

New lenders, new products

A shift in pricing

4. Methodology

5. Key contacts

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European Acquisition Finance Debt Report 2013 1

1. STATE OF THE MARKET

2 European Acquisition Finance Debt Report 2013

Ultimately, 2012 was defined by increased regulatory constraints, greater focus on risk and the impact of the eurozone crisis. Liquidity in the market has remained restricted as banks continue to rein in issuance, which in turn makes vulnerable their long-held position as the most popular form of financing. If this trend continues in 2013, a growing percentage will be exploring alternative sources of funding, presenting non-bank lenders with a strong opportunity to gain a larger share of the debt market.

Figure 1. Expectations for most active deal values in 2013*

Which of the following acquisition bandings by enterprise value do you expect to be the most active in 2013?

Less than €50m

€50m to €100m

€100m to €150m

€150m to €200m

More than €200m

2012 was a year characterised by the continued economic slowdown globally. As such, it was never expected to bring an end to the fallow period that has defined the last six years, when dealmakers and chief executives have lacked the confidence to strike the multi-million pound acquisitions typical of previous market booms.

That being said, overall volumes had been expected to hold up relatively well in the circumstances as a range of sellers looked to rebalance their private equity portfolios going forward. So, the European acquisition finance market began 2012 with a degree of optimism and, according to data from Dealogic, by the year-end did manage to see more deals completed than in the previous year, albeit by a modest fraction (5%).

In spite of strong balance sheets and the availability of cheap finance, adverse conditions restricted the debt market from realising a stronger growth rate with lenders determined to focus on the right deal. Last year also saw a drop in secondary and tertiary buyout activity, perhaps residual evidence of a mismatch between buyer and seller price expectations. Market stresses such as the continued uncertainty surrounding the eurozone debt crisis and a lack of confidence, politically and economically, clearly had a downward effect on valuations,

which in turn have made it increasingly challenging for sponsors to achieve adequate returns. In such circumstances, it is likely that some disposals by sponsors will have been postponed until markets and liquidity stabilise.

According to over 80% of respondents to our survey, liquidity was there to get mid-market deals done, having agreed there was more activity in transactions with values under £150 million, while just 20% felt this was also true for transactions over £150 million. This reflects the ongoing trend of challenging conditions for raising acquisition finance for more substantial deals and the need for investors seeking opportunities at this level to find more innovative capital structures. Looking ahead to 2013, our Report reveals that this trend is set to continue largely unchanged (Figure 1).

WHAT HAPPENED IN 2012

* results based on median figures from composite responses


DIFFERING VIEWS AS TO THE PROSPECTS FOR THE YEAR AHEAD

Over half of the survey participants (51%) believe that activity in the European acquisition finance debt market is likely to increase in 2013 compared to the year before (Figure 2). A slightly greater number (54%) also expect this will be true for their own institution.

A combination of factors supports a positive outlook, albeit tempered by slow growth. A sizeable portfolio of historic deals, that make up Europe’s “wall of finance” accumulated during a bull run that began in 2004, are close to maturity and will need refinancing over the coming five years. Although the European economies are not necessarily showing much growth, most institutions now view the risk of a major European default to be receding and instead share a growing confidence in economic stability.

Those that expect market activity to stall or even decline are guided by the belief that the macro risks remain broadly unchanged. Such risks include the threat of a triple dip recession aggravated by a European crisis that may yet unravel and perpetuate ongoing market uncertainty. This chain of events would inevitably act as major hindrance to the number of new deals done and therefore mute demand for debt.

From a global perspective, 2013 is expected to be a better year for international markets. Early seeds of pessimism, however, were planted at the start of the year by the International Monetary Fund’s (IMF) revised growth forecasts for the eurozone economy in 2013 . The IMF pencilled in a decline in gross domestic product of 0.2%, suggesting the euro area’s return to recovery after a prolonged contraction will be delayed and the large downside risk it poses to the global outlook will continue.

Concerns around growth have persuaded some survey respondents to expect businesses to continue their struggle in achieving full value should they seek an exit or new investment this year. Instead, they will opt to delay again until the economic conditions improve. On the other hand, a significant number of respondents from within this camp still believe the need for refinancing and bolt on acquisitions remains, and top quality businesses should still be able to buck these negative trends.

Regardless of this divide in opinion on prospects for 2013, some key factors appear more certain. In the current climate, a key European trend for 2013 will be the continuation of low interest rates, at least for the medium term, prompting investors still active in the market to chase yield. Of equal certainty is that banks will continue to face pressures from Basel III, national regulators, public opinion and eurozone financial instability, impacting lending conditions and cost of borrowing. Such challenging circumstances will create a huge shortfall in corporate funding and force some borrowers to explore alternative sources of finance. The €200 billion of sub-investment-grade debt due to mature in the next three years is one area in particular offering strong potential to direct lenders.

Figure 2. Anticipated market activity in the European acquisition finance debt market in 2013

Do you believe that the market activity undertaken by your institution in the European acquisition finance debt market in 2013 will be:

51%

6%

43%

Greater than in 2012

The same as in 2012

Less than in 2012


Fewer than one in five respondents believe the underwriting appetite of those providing debt will ever return to levels experienced in 2007 (Figure 3), regarding such conditions as being unsustainable, unprofitable and overleveraged. Six years later, it appears that financial institutions have adopted a greater appreciation for risk and a more careful approach when allocating funds. The risk appetite of banks, in particular, is unlikely to return to pre-2007 peak levels as higher costs of capital will inevitably squeeze both their assets and liabilities.

A minority, but still significant group of survey respondents, expresses greater confidence that conditions are close to being or are already in place for underwriting appetite to return to the boom years experienced prior to 2007. The US leveraged finance market is considered as robust as it was before the financial crisis, which is a strong indicator of what is possible if there is sufficient demand for credit from both funds and banks.

In spite of a relative lack of appetite for securitisation and a marked decline in Collaterised Loan Obligation (CLO) activity, the market is expected to heat up in the first six to nine months of 2013 before the CLO market reinvestment window starts to close. Indeed, new European CLO’s are beginning to reappear for the first time in 2013.

It is also suggested that underlying appetite for underwritten or traded debt deals, primarily in the mid-market and large cap market, remains in Europe and will attract premium pricing.

However, in order to get to the prices demanded by some vendors, many buyers will need to dig deep into the debt markets and consider alternative sources of liquidity. Although many of the institutions that used to participate in these markets appear to have exited for good, conditions are nevertheless anticipated to generally improve through 2013-15. Lending in the lower-mid market, however, is predicted to remain restricted.

APPETITE REMAINS FOR UNDERWRITING DEALS

80.4%

19.6%

Figure 3. Will the underwriting appetite of those providing debt ever return to 2007 liquidity levels?

Do you believe that the underwriting appetite of those providing debt will ever return to the levels experienced in 2007?

No

Yes

The opening months of 2013 have already proved appetite is there for merger activity. Whilst it is premature to declare a mergers-and-acquisitions boom, such as the LBO bonanza of 2007, the recent wave of high-profile international M&A deals has been backed by a confluence of factors. The stock market has hit levels not seen since November 2007, buoying market confidence. The wait-and-see approach adopted during the build-up to the US presidential election and negotiations concerning the fiscal cliff has since been set aside. Many companies, given little choice by the financial crisis but to lie low and cut costs, are now flush with cash. Investor appetite for debt also remains healthy, providing plenty of sources of capital to finance deal making. Not to mention the fact that the acquisition of other businesses is currently looking a far better prospect than earning near zero interest in a high-street bank account.

The problems in Europe, which escalated in 2011, shut down a series of potential transactions, but much of the region has now stabilised and the European Commission’s economic sentiment indicator in February 2013 rose for the fourth consecutive month to 91.1 from 89.2 in January. However, this data was drawn from surveys conducted before both the elections in Italy, the eurozone’s third-largest economy, that led to a political deadlock and the Cypriot banking crisis, that could still destabilise a fragile recovery and deepen the recession in the region.


In order to get to the prices demanded by some vendors, many buyers will need to dig deep into the debt markets and consider alternative sources of liquidity.”


2. FINDING PROFIT IN AN ERA OF SLIM MARGINS

SECTORS IN FAVOUR

According to 87% of respondents in our latest survey, business and professional services maintained their position as the most popular sector through 2012 (Figure 4). Feedback from participants suggests value in this sector has been partly driven by economic conditions that have forced businesses to outsource and rationalise operations. The healthcare sector, which one year ago had been anticipated to perform particularly well in the hardware, devices and drugs space, saw activity increase by 17% since 2011 and overtook manufacturing (67% vs 60%) as it continued to produce stable cash flows despite the volatile economic environment.

Activity levels for a number of sectors including real estate, consumer products and services, leisure and TMT have remained relatively stable since 2011. Our latest survey shows a marked rise for financial services, however, with 50% of respondents having invested in the sector in 2012 compared to just 28% the previous year.

According to our survey results, business and professional services are predicted to further consolidate their position as the most active sector in 2013 (Figure 5). The healthcare industry is also expected to be particularly sought after as it continues to offer growth potential due to shifting demographics in Western Europe and its relative protection from economic crises. Research by Dealogic is consistent with our survey findings regarding prospects for the healthcare sector, but interestingly ranks manufacturing, rather than business and professionals services, as the sector likely to experience the greatest number of deals in 2013. At the other end of the spectrum, meanwhile, a significant dip is predicted by our survey for retail and wholesale, as well as leisure, perhaps reflecting a decline in many consumers’ discretionary spend on leisure and luxury items.

Sector1. Business and professional services2. Consumer products and services3. Energy and natural resources4. Financial services5. Healthcare6. Manufacturing7. Retail and wholesail8. Leisure9. Real estate10. TMT

11. Other

Sector1. Business and professional services2. Consumer products and services3. Energy and natural resources4. Financial services5. Healthcare6. Manufacturing7. Retail and wholesail8. Leisure9. Real estate10. TMT11. Other

Figure 4. Most active sectors in 2012

In which of the following sectors did you invest in 2012?

Figure 5. Predicted active sectors in 2013

Which of the following do you think will be the five most active sectors in 2013?

86.7%

61.2%

43.9%50.0%

67.3%60.2%

48.0%

26.5%

7.1%

46.9%

2.0%

92.9%

60.2%49.0% 50.0%

80.6%

49.0%

27.6%17.3%

7.1%

49.0%

0.0%1 2 3 4 5 6 7 8 9 10 111 2 3 4 5 6 7 8 9 10 11



SECONDARY BUYOUTS BUCK THE TREND

Refinancing had been widely predicted to be at the forefront of deal activity in 2012, a forecast recently confirmed by Dealogic data (Figure 6). This reflected a continued focus on tackling a legacy of maturing LBO loans built up over the boom years and short-term funding arrangements made during the global financial crisis.

The data from Dealogic also shows that in 2012 restructuring accounted for just 2% of deals by volume, but which we assume is more to do with a lack of reporting restructurings rather than them not taking place at all. A significant margin is also clearly evident between the volume of refinancing deals completed (57%) compared to the number of deals for general corporate purposes (12%).

Secondary and tertiary buyouts now look set to upset the rankings. Our survey findings reveal they are expected to dominate deal flow for lenders in 2013, pushing refinancing into second place, followed by recapitalisations and family business/traditional management buyouts (Figure 7). Over 43% of those surveyed believe that these ‘pass-the-parcel’ deals will continue to be more abundant than the primary opportunities that private equity investors prefer. This activity in secondary and later-stage transactions is likely to remain high for the foreseeable future due to a number of factors, including the steep decline in public-to-private deals.

Refinancing 57%

LBO/MBO 19%

General Corporate Purposes 12%

Non-Core Acquisitions 7%

Recapitalisation 3%

Restructuring 2%

Others 0%

Figure 6: Deal types most prevalent by volume in 2012 (Source: Dealogic)

Figure 7. Deal types expected to be most prevalent by volume in 2013*

Which of the following deal types do you expect to be most prevalent by volume in 2013?

Public to Private

Family business/traditional management buyout

Secondary/Tertiary buyout

Management buy-in

Corporate disposal

Recapitalisation

Refinance



EUROPE’S NORTH-SOUTH DIVIDE

UK

According to our 2013 survey, the UK will continue to be the most active jurisdiction for debt providers in the European acquisition finance market. This is almost to be expected given the weight of private equity dedicated to this country and the large numbers of active intermediaries and lending institutions.

Traditionally preferred by investors over other jurisdictions in Europe, the UK market is expected to remain resilient. It is however likely to experience flatter growth than in other areas and, notwithstanding the introduction of new debt products, investors will have to work harder for deals in 2013. With the market environment predicted to become more challenging in the UK and across certain regions within Europe – where each jurisdiction has its own rules and constraints - many lenders will struggle to make progress without a strong local or sector focus, which will prove critical to success.

Whilst refinancings and recapitalisations have been the order of the day for many throughout 2012, we expect to see a greater degree of primary new deal activity during 2013 as price expectation settles, coupled with the assistance of increased liquidity which has emerged over recent months and the influx of new market participants with different funding return models.”

David Miles, Head of Debt Finance, DLA Piper London


Figure 8: Jurisdictions/Regions most active by volume in 2012 (Source: Dealogic)

United

Kingdom GermanyOthers

France SpainCEE/CIS

BeneluxNordics Italy Turkey

24.90%23.95%

14.03%

9.29%7.15%

6.27%5.49% 4.86%

2.04% 2.00%

Wolfram Distler, Partner, DLA Piper Frankfurt

GERMANY

Germany was accurately anticipated in our previous survey to perform second only to the UK in 2012, but with a significant margin between the two countries. According to new data by Dealogic (Figure 8), this margin was much narrower than predicted, which suggests that the country will increasingly challenge the UK’s position as the most attractive investment destination in Europe. Germany appears to have emerged from the global economic crisis with its reputation as an economic powerhouse not only intact but also enhanced.

This positive shift in gear probably owes much to the fact that the country’s economy is doing well. In contrast to predicting a second year of recession for Spain and Italy, the IMF expects Germany – the biggest country of the single currency area – to post growth of 0.6% . Germany also continues to offer rich potential, with its well-populated and traditional Mittelstand heartlands of engineering and industrial innovation. Germany’s Ifo Business Climate Index rose for the fourth straight month in February 2013, beating economists’ forecasts and bringing the closely-watched index back to levels not seen for many years. However, a recent report by the Bundesbank still sees sustained risks for the German banking sector due to the still smouldering sovereign debt crisis and more restrictive banking regulations.

Now that the UK shares France’s double-A rating, after being downgraded by the Standard & Poor’s agency earlier this year, Germany is one of the few major economies to retain a triple-A rating. This is likely to further reinforce Berlin’s role as the capital calling the shots in the 17-country eurozone.

We expect a wave of refinancings in the German market in 2013, but it is still too difficult to predict how many new-money acquisition financings we will see this year.”


FRANCE

France, according to our survey, was expected to hold on to its position as third most active jurisdiction in Europe for 2012, behind the UK and Germany – a prediction consistent with data from Dealogic. Deal activity in the country has continued to fall, however, with targeted M&A volume down 60% at $37.9 billion in 2012 matching their lowest level since 2010, according to Dealogic. Looking ahead to 2013, our survey respondents expect France’s position to continue to weaken and drop down the rankings as it is overtaken by a more confident Scandinavia (Figure 9).

Despite the European economic crisis affecting the French market, the first few months of 2013 have been much more active than the same period last year. Many bid processes are underway and the LBO debt restructuring market is booming. French banks have struggled to maintain their market share, although there has been some success for them in the mid-market space (alternative financings being generally more expensive for borrowers) as well as for more traditional mezzanine providers.”

Figure 9. Jurisdictions/Regions predicted to be most active by volume in 2013*Which jurisdictions/regions do you think will be most active by volume in 2013?

Benulux

CEE/CIS

France

Germany

Nordics

Southern Europe

UK

Outside Europe

Maud Manon, Partner, DLA Piper Paris



NORDIC REGION

According to data by Dealogic (Figure 8), Italy alone achieved a lower ranking than the Nordics in terms of deal activity by volume in 2012. However, respondents in our 2013 survey expect the region to give a much stronger performance this year (Figure 9). Despite better economic conditions in many emerging markets, European investors remain relatively cautious and appear more interested in the developed markets of Europe, and the Nordic region in particular.

Outside of Germany, the four Nordic countries are increasingly seen as the destinations most likely to attract private equity investment in Western Europe and performed strongly in 2012. The Nordic region also benefits from a vibrant lower mid-market, which is expected to continue.

With the notable exception of Denmark, the major Nordic banks are also remarkably healthy compared to their UK and European peers. Even so, they are struggling to lend at the levels that prevailed prior to the onset of the financial crisis. Stringent capital adequacy requirements and general market uncertainty has led to an intense focus on cost-cutting and expanding of ancillary business lines rather than putting balance sheets to use. The resulting liquidity shortfall has so far been bridged by a combination of alternative debt providers and bond issuance. Mezzanine funds are very active in the mid- to lower mid-market and there is increasing talk of and demand for unitranche debt. Some investment houses and funds have also started to provide senior financing for lower mid-market deals.

The beginning of 2013 has seen a pronounced increase in activity compared to what was a very quiet autumn 2012. Alternative non-bank funders and bond investors are increasingly active in all segments of the market, especially in the mid- to lower mid-market. It is probably only a matter of time before we see the first large unitranche transaction on the Stockholm market.”

Bjorn Sjoberg, Partner, DLA Nordic Stockholm

SOUTHERN EUROPE

Forecast activity in Western Europe partly highlights how three elements central to a sustainable increase in M&A activity appear now to be in place. The availability of cheap finance within recovering debt markets, a steadily evolving confidence since the easing of the eurozone debt crisis, and economic logic pointing to deals as the optimal route to realising growth have triggered an improvement in sentiment among Europe’s leveraged buyout groups.

In stark contrast, the market in Southern Europe remains under intense pressure, reflecting limited appetite from risk-averse cross-border investors and a lack of available debt. Although European LBO loans in general are affected by a continued lack of clarity and confidence regarding the outcome of the eurozone crisis, countries perceived to be the least strong are affected the most.

In spite of Italy and Spain having substantial refinancing falling due, especially relative to the size of their countries, banks in Europe are not in a position to meet the large refinancing needed over the coming years, instead having to comply with regulatory requirements to delever their balance sheets and raise more capital. In response to this drop in bank lending, distressed debt funds have been expanding their operations in the region in anticipation of big returns. In spite of their enthusiasm, a frustrating consequence of the ongoing low interest rate environment, which few economists predict as likely to rise in the foreseeable future, has been to allow even companies with unwieldy capital structures to service their debt and so limit the number of restructurings.

Due to the existing liquidity hole and the problems that the Spanish economy is still experiencing, non-bank lenders are indeed expected to play a crucial role to bridge the lending gap in what we expect to be increasing refinance activity. Transactions will very likely combine both senior and subordinated debt elements in order to meet all parties needs and expectations.”


Cesar Herrero, Partner, DLA Piper Madrid

3. BRIDGING THE LIQUIDITY GAP



BANK RESERVATIONS

The start of 2012 saw banks finding loan profitability more challenging. Banks have been preoccupied with their own housekeeping, thanks both to long-term regulatory pressure and a eurozone debt crisis that has impacted their funding costs. To some extent, therefore, a shift had been expected in the composition of participants in debt markets from traditional senior lender banks towards non-bank providers of debt.

The risk appetite of banks looks likely to be further tested in 2013, as shown in Figure 10, with the number of survey respondents expecting senior debt leverage to go higher than 4x increasing significantly from last year (16% in 2013 compared to 1% in 2012). More also expect senior debt leverage levels to sit between 3.75x and 4x (from 18% to 26%). Very few traditional senior lenders have had or will have the appetite for deals with a senior debt leverage beyond 4x. Compelled to focus on compliance with regulatory and internal requirements, sponsor-backed transactions which push up leverage levels will continue to be a challenge for some banks.

Many corporations will inevitably continue to rely to some extent on bank loans for financing acquisitions, while the ability of private equity firms to strike multi-million dollar transactions will depend on the willingness of banks to lend them money. We may, however, also be witnessing a more profound structural change in the acquisition finance market. As commercial banks retrench to core markets and ‘safer’ products driven by the need to continue to repair balance sheets and comply with higher capital ratio requirements, new non-bank players are stepping up to bridge the liquidity gap.

Figure 10. Expectation for average senior debt leverage in 2013

What do you think will be the typical senior debt leverage cover on a transaction in 2013?

10.9%

27.7%

19.8%

25.7%

13.9%

2.0%0.0%

Less than 3.25x

3.25x - 3.5x

3.5x - 3.75x

3.75x - 4x

4x - 4.25x

4.25x - 4.5x

More than 5x


NEW LENDERS, NEW PRODUCTS

Restricted access to traditional loan funding will continue, Europe’s CLO market is hampered by regulation and uncertainty, and the high-yield market is volatile, which is of particular concern for private equity firms needing to finance deals. Indeed, survey responses suggest there will continue to be little or no debt arranged by private equity houses, insurance companies or sovereign wealth funds in the European acquisition finance debt market in 2013 (Figure 11). Instead, according to one in five respondents, private debt funds are expected to be the only other lender of significance in 2013. In fact, expectations surrounding this market have almost tripled since last year’s survey. When you consider that close to 80% of debt transactions are still expected to involve banks in 2013 and the profile of the specialist private debt fund sector was minimal this time last year, making such rapid growth in so short a space of time is impressive.

Non-bank lending accounts for 60% of corporate funding in the US, which highlights the scale of opportunity Europe offers for new direct fund lenders. As Basel III forces banks around the world to adjust their activities, analysts calculate there will be a €125-250 billion funding gap for European companies

As well as finding the right deal, 2013 will be about finding the right type of funding. Regarding non-bank lender sourced debt to fund transactions, our survey respondents expect the European high-yield bond market to play a lead role in 2013, as shown in Figure 12, followed by unitranche, unsecured high yield bonds and mezzanine debt.

The European high-yield bond market has indeed reportedly got off to a strong start this year, supported by low interest rates and a shift by companies to capital markets for funding. Even though the near-term horizon appears positive, it is worth noting this market remains subject to political and economic tremors that can have a significant adverse impact.

Participants1. Bank2. Private Equity Houses3. Private Debt Funds4. Sovereign Wealth Funds5. Insurance Companies6. Other

Figure 11. Anticipated active participants in arranging debt in 2013

Who do you expect to be the most active arrangers of debt in the European acquisition finance debt market in 2013:

79.4%

0%1 2 3 4 5 6

0% 0%1%

19.6%

A number of our survey respondents noted that private debt funds are in a particularly strong position as they have the ability to react quickly to market trends and provide sponsors with additional flexibility around their capital structures. They commented that debt funds can also tailor a debt product to the capital structure required – be that straightforward senior, structured senior, mezzanine, unitranche or something completely unique, such as split collateral Unitranche / ABL structures.

Leading up to 2012, the reduced levels of senior liquidity in the market proved to be an opportunity for the mezzanine community. The challenge now for traditional mezzanine lenders, the pricing of which has become too rich for many sponsors, is to develop innovative and creative solutions that address the structuring issues faced by financial sponsors in a market that continues to change.

Whether or not the opening months of deal activity in 2013 actually spark a fresh wave of mergers and acquisitions, the loan market is in need of supply. In recent years, the source of new supply has primarily been the refinancing of existing loans, creating pent-up demand. Companies are sitting on a substantial amount of cash that needs to be deployed, operating margins are near their highs and will be difficult to expand further, and organic growth is challenging in the current tepid economic environment. How much actual activity in the debt markets takes place in 2013, and in which sectors, remains to be seen but, with a number of drivers evident, plus interest from potential lenders, the market is certainly set for some movement in the next 12 months.


Sources1. Mezzanine2. Cash Pay/PIK3. Second Lien4. Unitranche5. Receivable Financing6. High Yield Bonds - Secured Notes7. High Yield Bonds - Unsecured Notes8. “Business Finance Partnership” government-backed loans

Figure 12. Expectation for non-bank lender sourced debt used to fund transactions

In relation to non-bank lender sourced debt used to fund transactions, which of the following do you expect to be most prevalant in 2013?

1 2 3 4 5 6 7 8


A SHIFT IN PRICING

Whichever source of financing is used to fund transactions, pricing will remain one of the largest concerns for dealmakers. The cost of debt funding has changed from the expectations laid out in last year’s survey. Looking ahead, a changing market means expectations around debt funding costs have moved on from one year ago, when four out of ten respondents expected arrangement fees would exceed 4.5%. One year later, the total number that share this view has fallen by half. Instead, our 2013 survey shows a marked shift in the number of those who anticipate fees to be below 4%, with 26% now taking this position compared to 9% last year (Figure 13).

A possible explanation for this change could be increasing competition amongst senior lenders or the introduction of other products to sponsors forcing senior debt arrangement fees to drop. While senior debt structures are still expected to continue to be the most typical debt structures in 2013, according to our survey, 26% of respondents expected unitranche as the first alternative to senior-only, increasing substantially from 12% expected in 2012 - and higher than any other form of debt product proposed (Figure 14).

Based on our experiences over the closing months of 2012 and the first quarter of 2013, we think that this year will be remembered for an influx of new lenders and new products in the acquisition finance mid-market. Time will tell whether these changes herald a closer and longer-term alignment of the European acquisition financial markets to those in the US.”

Figure 14. Predicted typical debt structures in 2013*Which of the following do you think will be the most typical debt structure in 2013?

Alexander Griffith, Partner, DLA Piper London

Senior Only

Senior and Mezzanine

Senior and receivables financing

Unitranche and Super Senior

Combination Debt Finance/High Yield Bond

High Yield Bond Only


Less than 3.5%

3.5% to 3.75%

3.75% to 4%

4% to 4.25%

4.25% to 4.5%

More than 4.5%

Figure 13. Predicted typical senior debt arrangement fee pricing in 2013What do you think will be the typical senior debt arrangement fee pricing in 2013?

4. METHODOLOGY


Our research was carried out through an online survey of participants in the European acquisition finance market. Responses were received from over 45 financial institutions active in the lending community including, 3i Plc, Akbank, Ares Capital Europe, Armada Mezzanine Capital, AXA Private Debt, Babson Capital Europe Ltd, Barclays, Beechbrook Capital, GE Capital, HSBC, Indigo Capital LLP, Investec, Lider Faktoring, Lloyds Banking Group, NIBC Bank, Nordea, Nordic Mezzanine, Park Square Capital, The Royal Bank of Scotland, Rothschild, Santander, SEB Mid Cap Acquisition Finance, Sovereign Capital Partners, Sun European Partners LLP, Swedbank, Turkven Private Equity, UniCredit and Vespa Capital.

All figures used in this report are based on the responses received. Where respondents were asked to rank their answers, average rankings have been calculated to provide an accurate representation. This works particularly well for highlighting which options scored especially low or high.

Data sourced from Dealogic has been used throughout this report and displayed in accordance with Dealogic standard criteria from Loan Analytics. Please contact [email protected] for further information.



5. KEY CONTACTS


Philip ButlerHead of UK Finance and ProjectsT: +44 (0)20 7796 6297E: [email protected]

David MilesHead of Debt Finance, LondonT: +44 (0)20 7796 6299E: [email protected]

Alexander GriffithPartner, UKT: +44 (0)20 7796 6158E: [email protected]

Julie RomerLegal Director, UK T +44 (0)20 7796 6935 E: [email protected]

Wolfram DistlerPartner, GermanyT: +49 69 271 33 202E: [email protected]

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Documents

Novel Synthetic Transformations Mediated by IBX and DMP