With markets seemingly convinced that Euro concerns are behind us, 2013 has seen the return of larger market merger and acquisition (M&A) deal activity. Recently announced transactions include Dell, Heinz and Virgin Media. There is also press speculation on Everything Everywhere and Elior. The continued strong condition of credit markets is an important factor in each of these transactions.
It remains to be seen whether this activity at the larger end of the market will lead to increased M&A volumes in the mid market, where the pipeline remains thin.
In the absence of strong M&A volumes, activity in the credit markets has been driven by repricing and refinancing activity. Borrowers across Europe have taken advantage of the benign conditions to raise financing at record low yields.
Credit markets have also opened up to issuers from peripheral Europe as investors continue their relentless search for yield. For borrowers with upcoming maturities or with financings taken out at a time of higher pricing, this is an excellent time to seek improved terms from the market. The product choice available to borrowers has also increased markedly through the last quarter to include long dated RPI-linked bonds and convertibles as well as bespoke private side instruments.
Companies are advised to take advantage of these conditions while they last, as we expect a credit market correction to occur in the 2nd half of the year and a return to more volatile conditions.
Collateralised loan obligation (CLO) issuance in Europe has returned with Cairn Capital’s arbitrage CLO. Questions remain as to whether this will lead to a steady flow of new issuance, given the lack of primary loan issuance activity and continued regulatory concerns. We remain highly concerned around the depth of liquidity in the second half of the year given the €25 billion of CLO funding exiting re-investment periods this year.
Our hot topic in this issue covers the real estate sector. There has been a shift from bank to nonbank lending in the real estate market across both prime and secondary real estate assets. Insurance companies are increasingly seeking prime opportunities whilst direct lending funds are attracted by the higher yields available from secondary sites. This fragmented investor base, while adding potential complexity for CFOs, also brings much needed liquidity and flexibility to the market.
The rise of direct lenders has significantly increased the product choice available to companies. Now is the opportune time to take advantage of the robust liquidity and consider M&A or refinancing activity.