Dec 12 Activity is picking up in UK leveraged
lending as private equity firms start to target middle market
buyouts which have more attractive valuations after the sharp
fall in sterling after Britain's vote to leave the European
Union in June.
Changing currency dynamics are also making British buyout
deals more appealing due to the premium that sterling offers to
compensate investors for lending in a less liquid currency,
despite the uncertainty the Brexit vote has cast over the UK
For US private equity firms with dollars to spend and
European sponsors deploying euros, the 15% fall in the pound
since the referendum is making the valuations of British
companies more attractive.
"The change in the exchange rate has put them (US private
equity firms) in a good position," a mid market banker said.
UK leveraged loans are starting to pick up after a slow
2016, which was overshadowed by the Brexit vote and left
investors unwilling to take risk in sterling.
British leveraged loan volume of £19.2bn for the year to
date, is 48% lower than the same time last year, when £37.2bn of
deals had been completed, according to Thomson Reuters LPC data.
Dealflow is starting to recover, however, after hitting a
six-year monthly low of £124.9m in July, which was the lowest
monthly volume since February 2010.
EQT announced on Friday it will acquire UK veterinary care
business Independent VetCare from Summit Partners using one of
its euro-denominated funds. The financing package is expected to
be around £150m. The Swedish private equity firm fought off
competition from Bain Capital, Nordic Capital and Canadian
pension fund giant Omers.
The sale of UK dentistry firm Oasis also attracted strong
appetite from private equity firms. Advent, Ares and Swiss
investment firm Jacobs Holding submitted final round bids before
being gazumped by strategic buyer Bupa's higher offer of £835m.
A smaller number of UK private equity firms with sterling
funds are also continuing to invest in British companies. Direct
lenders, including Pemberton, are also targeting the UK, and are
seeking to exploit an anticipated slowdown in UK lending by
foreign banks in the next five years after Brexit.
"Sterling-only private equity funds are deploying as per
usual, and now you are getting the euro, swiss and dollar-based
funds looking at the mid market and taking the view that
sterling is cheap in the medium term," a direct lender said.
Institutional debt investors are increasingly being lured to
the market because the premium between sterling and
euro-denominated deals has increased from around 50bp to as much
as 100bp since the Brexit vote, he said.
"A number of investors are now looking at UK loans as an
arbitrage. The cost of hedging is only up 25bp per annum but
there is 85bp-100bp more yield," he said.
A £180m all-senior buyout financing was syndicated in August
for UK utility and infrastructure services company Morrison
Utility Services and education firm Study Group refinanced an
existing bond with a £230m-equivalent term loan.
"A month before Brexit everything was on hold, a couple of
weeks after Brexit there was calm and now we are seeing very
strong deal flow," the lender said.
The Brexit vote is, however, limiting the types of
businesses that are able to tap the market, at least in the near
term, to strong domestic businesses.
"These are all very good domestic-focused businesses immune
to the broader pressures Brexit might bring. There is a
well-developed bank and direct lender market prepared to support
them." a second banker said.
Around 70% of the UK buyout pipeline currently consists of
healthcare businesses, a third banker said.
"I think it's a reaction post-referendum that buyers are
thinking there is still uncertainty out there but we can be
relatively confident in healthcare - that that's a sector if we
put money in now it's still going to be there," he said.
The fledgling flow of deals could however stall as
uncertainty grows in the run up to March next year when the
government plans to trigger Article 50.
(Editing by Tessa Walsh)