Strikingly EU banks hardly use market information even for ongoing monitoring

Strikingly eu banks hardly use market information

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Strikingly, EU banks hardly use market information even for ongoing monitoring purposes, though such information may provide
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36ECBLarge banks and private equity-sponsored leveraged buyouts in the EUApril 2007forward-looking insights into the performance and credit quality of LBOs. To a large extent, this can be explained by the fact that in Europe the markets for LBO debt instruments have – until recently – been lacking in comparison with the US. Monitoring by banks could be facilitated and improved if LBO debt instruments were actively traded on liquid markets.233.3 OUTLOOK FOR THE EU’S LBO MARKET ACCORDING TO THE SURVEYED BANKSThis section provides a summary of the opinions on the outlook for the EU market as expressed by the banks who participated in the BSC survey. EXPECTATIONS FOR MARKET TRENDSAccording to the survey results, almost every bank expected deal sizes to increase further. In banks’ view, this trend was likely to be underpinned especially by big public-to-private (P2P) transactions, followed by secondary buyouts and recapitalisations. Some banks indicated that while, on the one hand, they expected only few large private equity funds to be involved in these large transactions, smaller but (sectoral or regionally) specialised funds could also benefit from their expertise and remain relevant players. In contrast, the mid-tier segment of the LBO sponsor industry was expected to undergo a phase of consolidation in the medium term. Banks concurred in that European debt financing was strongly being driven by the expansion of institutional investors, including CDO and CLO managers, insurance companies, pension funds and hedge funds, with institutional investors accounting for approximately 50% of the debt part of new LBO deals. Most banks expected this share to grow further over the next few years. While default rates continued to remain exceptionally low, there was the perception among banks that the market was beginning to distinguish between certain types of credit and industry. In particular, the automotive supply industry, which has traditionally been a favourite target for LBO funds due to their long and stable contracts with car makers, was being avoided following several high-profile cases of credit quality downgrades. Regarding the outlook for covenant policy, banks seemed to have different views, as some foresaw a further dilution of covenants, whereas others predicted no major changes either in new covenant structures or the number of breaches of existing loan covenants.Most of the responding banks admitted that a significant rise in interest rates would pose a major threat to the LBO market. While target companies often tend to hedge most of their interest rate risk, refinancing of secondary buyouts and arranging of new deals could be more severely affected. Regarding the possibility of an economic downturn, the outlook could be worse still. Almost half of the surveyed banks said that even existing deals were more likely to turn sour as first covenant
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  • Fall '18
  • LBOs

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