Baird expects the penetration of debt funds providing unitranche financing for private equity M&A transactions to increase across Europe, including the Benelux region
The acquisition of DORC Holding BV (“D.O.R.C.”) by Montagu Private Equity earlier this year represents the first sizeable leveraged buyout (LBO) in the Benelux funded by unitranche financing. GE Capital and Ares Management arranged €110m of unitranche, working capital and acquisition facilities for the acquisition of D.O.R.C., a provider of medical instruments and equipment for ophthalmic surgery. Over the last few years, non-bank lenders, primarily debt funds, have provided an increasing share of LBO financing across Europe, particularly in the UK. Will the recent D.O.R.C. deal lead the way for unitranche facilities to finance more LBOs or participate in refinancings in the Benelux?
Traditional Benelux Financing Market
Debt funding for middle market LBOs in the Benelux has been provided by a handful of traditional bank lenders, namely ABN AMRO, ING, KBC, NIBC and Rabobank. The relatively oligopolistic nature of the domestic market and the prevalence of club deals gave private equity firms limited optionality, providing primarily senior debt. For bigger deals with enterprise values (EV) of over €400m, larger foreign bank lenders tend to provide underwritten financing.
Although asset-based lending and mezzanine financing have been available, these financing methods supplement the traditional senior bank finance while the high yield bond market is reserved for larger transactions. The D.O.R.C. transaction demonstrates a middle market alternative from debt funds.
Advance of Debt Funds
Debt funds are now prevalent in the majority of middle market M&A processes (above €10m EBITDA) involving private equity buyers in the UK. Their presence, already well established in France, is increasing across the DACH region and Scandinavia and new debt funds are also emerging in Italy. Unitranche funding for new LBOs or refinancings in Europe has increased over 150% from 2012 to 2013. Unitranche transactions this year have included:
- Acquisition of Asmodee in France by Eurazeo (€65m unitranche from European Capital / Tikehau Inv. Mgmt.)
- Refinancing of NoteMachine in the UK owned by Corsair Capital (£76.5m unitranche from GE Capital / Ares)
- Acquisition of Mec3 in Italy by Riverside (€80m unitranche from ICG)
- Refinancing of family owned Trust Inns in the UK (£130m unitranche from Macquarie)
- Minority take-out of Groupe Looping in France owned by HIG (€30m unitranche from Alcentra / BPI France)
- Refinancing of Parkdean in the UK owned by Alchemy Partners (£153m unitranche from GE Capital / Ares)
As many of the debt funds are unable to provide regular banking facilities such as revolving, capital expenditure or acquisition facilities, alliances between some players have been formed to provide both the unitranche facility and the banking facilities. The European Senior Secured Loan Programme (ESSLP), which is a joint venture between GE Capital and Ares Management, replicates the $11bn SSLP in the US. This €1.75bn programme provides flexible unitranche financing for the European middle market with approximately half already committed. Further, banks have announced alliances with debt funds (Barclays and BlueBay) or have established protocols to enable documentation facilitating super senior status to the banks.
Debt Fund Proposition
Debt funds offering unitranche facilities in the broad range of €30m to €300m have the following advantages compared to traditional financing structures (‘senior debt only’ or ‘senior debt + mezzanine’):
- Higher leverage, typically 1x EBITDA higher than ‘senior only’ facilities
- No or much lower amortisation, allowing more retained cash for growth and investment
- Greater maintenance covenant headroom (covenant-lite structures are rare in Europe)
- Accelerated credit approval process with single loan agreement embracing all facilities
- No need for syndication and ability to scale up commitment for add-on acquisitions
- Increased competition when debt funds provide the term loan ‘b’ piece of structures within a club deal
Unitranche facilities have the following disadvantages compared to traditional financing structures:
- Higher pricing / margins with blended rate of LIBOR + 7% to 9% (1% floor)
- Requirement for inter-creditor arrangements
Baird expects that traditional bank lending will continue to account for the majority of LBOs and refinancings in the Benelux. However, debt funds and the availability of unitranche financing will increase optionality for private equity firms in the region. Specific situations and transactions, such as D.O.R.C., will benefit from the flexibility that unitranche financing provides. Debt funds will serve to improve the LBO and refinancing market in the Benelux.
For more information about this article or Baird, please contact:
Head of European Investment Banking
+44 207 667 8216
European Debt Advisory
+44 207 667 8271
European Financial Sponsors Coverage
+44 207 667 8308
Baird is a leading middle-market investment bank serving the strategic and financing needs of our global client base. Baird’s Debt Advisory group works seamlessly from one global, integrated platform with our industry sector bankers and our M&A and equity product specialists to offer clients unconflicted and objective capital structure advice. Importantly, Baird’s differentiated advice is not only focused on executing a client’s current financing needs, but is also focused on evaluating all asset classes and financing alternatives to ensure the client’s long-term capital structure matches its long-term strategic objectives. Baird maintains strong relationships with the leading middle-market sources of debt capital, which Baird brings to bear for its clients raising capital for sell-side and buy-side M&A transactions, recapitalisations, refinancings, and specialty lending situations including cross-border financings. With extensive execution experience across the globe, Baird has the proven ability to create efficient, competitive processes that drive superior pricing and terms as well as increase the speed and certainty of close.