In the Debt Markets – Video Transcript
Hi, welcome to the third webcast accompanying our In the Debt Market series. 2012 feels like the environment that we faced when we were going into the summer in 2011, the markets changed quite markedly from my point of view, driven by macro themes and the lack of ability of investors and capital providers to price risk. I’d like to talk to Sandeep Pradhan who runs our Debt Markets business about investor appetite and John Williams who runs our Debt Business that faces the financial sponsor community to talk to him about how we can deliver for our clients and trends and things that he’s seen. Sandeep, I don’t know what your thoughts are around my kind of all expansive comment that the market feels like it did in June 2011, and feels as though we’re at a point of inflection, does it seem that way to you from the conversations that you have with the investor community?
Yes, I’d agree with that Nick. I think post-Easter, we started to see sentiment starting to change versus the first quarter albeit as recently as two weeks ago, Ineos was successful in refinancing a large part of its capital structure.
And that was an unloved credit in the chemicals world that for a long period of time struggled to find capital providers.
That’s right. Accessing the very deep pools of liquidity in the US markets. I think what we’ve seen in the last week though is certainly sentiment going a turn for the worse, volatility returning with a bang in the European markets. And we’ve seen that first in the high yield markets. Europcar having to increase the yield on its bonds by a significant amount to get that deal away, Monier having to actually pull its bond. The question that we’re now going to see is what impact is this going to have on the coming pipeline of deals? What’s the risk appetite of arranging banks going to be for the likes of BSN and Birds Eye? Will we see them reducing risk appetite for fear of what happened last year or will they keep a bullish attitude to deals?
Well, let’s talk about that for a minute in so far as those deals are sponsor owned businesses, albeit at the larger end of the sponsor world, given where sponsors can raise capital and what levels of capital we can raise in Europe today. But what have you seen John when you’re talking to sponsors or capital providers to sponsor deals, in terms of behaviour and solutions that we can bring to our clients?
Well I think volatility is clearly a big issue for sponsors and that issue isn’t going away, but one of things we have seen is how the loan community is trying to adapt by providing different structures. One of the common things we’re seeing at the moment on deals we’re looking at is the increasing use of Unitranche structures. And these structures can be extremely flexible for sponsors. So, both on pricing and also on amortisation and furthermore sometimes they have flexibility around covenants. So in terms of the headroom and also what covenants are in the docks. And the reason they can be so flexible is because the providers are putting down much larger ticket sizes. So whereas banks typically provide £25m as the final take on a transaction, some of these Unitranch providers can provide up to a £100m, sometimes beyond. And the impact of that is that you can end up providing the entire debt structure which means that negotiations are bilateral and therefore it’s a truly bespoke solution to the sponsor’s need. And I think that’s quite unique to the market at the moment.
Are you seeing in that environment a trade off between price of capital and delivery?
Not really. I mean a Unitranche is like a blended price between a senior and mezzanine solution. What we saw in a recent deal Nick, was we had a mid market transaction, less than a £100m of debt, there was an all senior solution on the table, a senior mezzanine solution on the table, both of which we’d expect to see, but there are also two Unitranche solutions as well, which is something you wouldn’t have seen a year ago. And at the end of the transaction, a sponsor could choose from one of the four, which I think is a really positive move in the market. So, volatility is an issue, but the market is trying to adapt.
I think we have seen a lot of new investors coming into the market to take advantage of banks reducing their lending appetite and having the ability to provide these more flexible structures that you talked about, John.
Interesting take away then for this issue would be that the alternate providers are there, we can access them, the messaging to our client base is that these are alternate forms of finance but they will solve your capital problems. Deals can still get done.
Sandeep, John, thanks very much. It’s seems like the factors we’ve discussed today, have been with us now for some time and we expect that to continue. Volatility, macro-uncertainty in Europe, but messaging is quite clear, loud and clear, despite the marked change that we’ve seen in the financing market. Solutions can be delivered to our clients that are innovative and that do actually provide stability in their capital structure. Whether or not they’re bank distributed solutions or alternate finance solutions is the key question.
Early year optimism appeared to stabilise markets but the effects of the Long Term Refinancing Operation appear to be waning as secondary asset prices fell in April. Market sentiment has taken a turn for the worse and volatility has returned with a bang in the European markets.
For CEOs and CFOs there continue to be a number of macro themes causing uncertainty and a cautious attitude to M&A activity – political uncertainty, continued Eurozone debt issues, growth worries, inflation, bank de-leveraging.
Non-bank funders continue to play an increasingly important role as they offer companies an important source of additional liquidity. Although this liquidity can be more expensive than traditional bank pricing, funds can often offer companies significantly more flexibility.
Our Debt Markets and Debt Brokerage businesses are regularly speaking to over 150 investors. As fragmentation continues, reach and scale will be key to accessing this investor base.