Bankers Need More Than Tea to Revive Europe’s M&A Debt Pipeline

(Bloomberg) -- Bankers are pinning their hopes on potential jumbo buyouts such as Unilever NV's tea business to pep up the meager debt-raising pipeline for the latter part of the year.

Sales processes put on hold or delayed while the pandemic raged are starting up as sellers regain confidence in buyers' appetite. But the hiatus in M&A activity means there's only a short queue of deals waiting to launch in Europe's leveraged finance market.

Leveraged loans raised to support M&A are currently trailing 15% behind last year, data compiled by Bloomberg show. That lag could extend by year-end unless new deals emerge, leading to a likely drop in banks' fee income from underwriting.

“The three to four month pause will impact what will come in September. There are starting to be discussions, but even if processes start soon there is unlikely to be a strong pipeline of debt till the fourth quarter,” says Sarah Mackey, EMEA head of leveraged capital markets at UBS Group AG.

As well as Unilever's tea unit, which could be worth more than 5 billion pounds ($6.6 billion), Royal Philips NV may sell its home appliance business for up to $4 billion. Walmart is again exploring a sale of U.K. grocer Asda, with a possible price tag of 7 billion pounds. Private equity victories here would give banks a chance to underwrite large LBO debt packages.

The pipeline isn't entirely empty. There are large corporate acquisition financings for Adevinta ASA and Ineos Styrolution Group GmbH, and bonds to come for Masmovil Ibercom SA and IMA Industria Macchine Automatiche SpA to support public-to-private buyouts.

But for now, there are no post-summer LBOs lined up of the scale of Merlin Entertainments Ltd or Refinitiv as there were in recent years, and the usual groundswell of mid-sized deals is largely absent. In some cases, new buyouts aren't generating fresh mandates as existing debt stays in place.

Take-private deals that emerge without a long sales process may boost new debt business in the coming months, as sponsors weigh up whether the pandemic has made valuations attractive. But timing for these deals is always uncertain.

Caution, Speed

Bankers are ready to take on more risk. They've seen the pre-Covid deals sell down, and know there is demand and at what price. But they will still be comparatively conservative on how much debt they offer as a multiple of earnings, and selective on sectors.

“Banks are actively prepared to commit to new M&A related financings, but those sectors facing more acute credit concerns will probably find fewer underwriters on generic terms,” said Martin Luehrs, co-head of EMEA leveraged capital markets at Morgan Stanley.

They'll also want to shift underwritten deals as soon as possible. That could make the final weeks of the year busy, and borrowers may have to pay additional fees to enable banks to come to market without delay.

“The key is reaching an agreement with the borrower or sponsors so that banks can issue the debt very quickly,” said UBS's Mackey.

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