In the debt markets: Issue 4

 

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Hello, and welcome to the latest edition of our ‘in the markets series’. My name is Sandeep Pradhan I run our debt markets team within PwC’s Debt and Capital Advisory. I am joined today by David Godbee, who is a partner in Debt & Capital Advisory and Carlo Rusche, from the Debt Markets team who covers a lot of the non bank, non traditional sources of finance for us. David, if I was to summarise the state of the market today - overall, there is a lack of M&A related deal flow, but the technical conditions in both the loan and the bond markets, are extremely strong. We have seen secondary prices go up significantly over summer. We have seen deals such as Bartech raise substantial oversubscriptions, reverse flexing twice in the process. In the bond market, where that market had historically, up to now, really been open for BB credits, strong seasoned issuers, are we starting to see that market also now open up to lower rated issuers?

David: Yes, I would agree with that. I think the European high yield markets are still affected by Euro zone concerns and also the general economic outlook. However, as a market, it has not been consistently open for the past 12 months. I think Q1 was pretty good but since then, and certainly through the summer, it has been a little bit choppy with windows of opportunity for certain issuers. I think as a result of that, a number of European issuers have actually been looking to the US market which is more consistent in terms of liquidity and delivery. I think going into September we have seen a flurry of activity and, as you say, there have been some names, not just BB names, that have managed to get away – Cabot, being a good example.

Sandeep: So, it seems as if, for an issuer, timing in terms of going to market is really key?

David: I think that’s absolutely right. I am not sure if the European high yield market can always be relied upon to be open, so you would not necessarily use it as your only option for a refinancing or M&A situation but if you get that timing right, as Kloeckner Pentaplast who we advised did, in July they managed to get a CCC issue away. It was oversubscribed and priced well within guidance.

Carlo: And the timing point makes it important to also have an alternative solution available in such a process.

David: Yes, absolutely.

Sandeep: So, we are seeing all this liquidity in the institutional markets and the capital markets, yet we are continuing to see banks going through their deleveraging programme.

David: Yes, that is absolutely right. We are seeing an increasing number of transactions in the non-core loan portfolio market. And I think that has really been driven by banks wishing to deleverage their balance sheets. It is an enormous market. There are two and half trillion Euros of non-core loans that banks need to deal with and increasingly, given the size of the market, we are seeing a lot of appetite from a whole different series of investors, whether it is private equity, credit opportunity funds and also hedge funds - as well as lenders that are willing to finance those particular transactions.

Sandeep: And we completed the sale of a mezzanine book just only recently, so that trend from what had been a lot of real estate portfolios is increasingly leveraged loan books, performing loans, as well as non performing loans.

David: I would absolutely agree with that. There are a number of leveraged loan portfolios that we have advised on recently and they really cover the whole spectrum – both performing and non performing loans and through the capital structure, whether it is senior debt, all the way to through to equity positions.

Sandeep: And Carlo, as we are seeing banks retrench from a lot of these asset classes, the borrower community, what other alternatives to bank finance, are we seeing out there?

Carlo: Well clearly, at the moment, large and more established borrowers can access the bond markets but we are increasingly seeing alternatives emerge for smaller, less established, perhaps more complex credits. One notable example is the private placement instrument, for which we are seeing increased awareness and usage. And in the current market it can be a quite an attractive alternative to bank loans. A more recent development is the setting up of dedicated loan funds by, for example, insurance companies, sometimes with a specific sector focus on sectors they deem attractive, such as real estate and social housing. And given the lack of liquidity in some of those sectors, that is clearly a helpful development. In the leveraged space, we are seeing a very similar development where institutional investors are accessing and providing capital to borrowers directly, as opposed to via intermediaries. So, we are seeing a range of institutional investors such as hedge funds, insurance companies, more traditional asset managers providing capital directly and stepping into the space where banks are retrenching currently.

Sandeep: So, if I was to summarise, the investor base is getting more fragmented, perhaps more complicated. But there is a lot of liquidity out there across all the asset classes, in both the traditional sources of finance, as well as this new non traditional area. So, lots of liquidity and certainly it is very possible in this market to get deals done.

Sandeep: OK, well thanks very much for joining us today. I hope that you found it informative. If you would like more information, please do look at our website. Thank you.

The twin macro themes of the eurozone crisis and global growth have continued to drive the capital markets.

One trend we continue to see across debt asset classes is the increasing importance of non-bank funding to companies.

From our conversations and deal activity with the 200 investors covered by our desk, we have seen increased lending appetite from a range of non-bank funders including insurance companies, sovereign wealth funds and direct lending funds who are taking advantage of increased institutional interest and government initiatives around increasing financing availability to small and medium sized businesses.

It has become increasingly important for CFOs to be able to navigate this diverse group of alternative funders as many traditional bank lenders remain focussed on de-leveraging balance sheets.