2006 proved to be an exceptional year in respect of LBO transaction volumes and deal counts. The amount of loans issued for LBOs reached nearly €120 billion, whereas the number of deals amounted to nearly 250. Based on loan volume and deal count, France, UK and Germany remain the most active EU countries in the LBO industry (see Chart A). The performance of 1 Unless otherwise stated, the data source for Box 1 is Standard and Poor’s European Leveraged Buyout Review Q4 2006.
13ECBLarge banks and private equity-sponsored leveraged buyouts in the EUApril 2007OVERVIEW OF THE EU’S LBO MARKETthe LBO industry has also shown considerable improvement, with long-term performance (measured by ten-year buyout returns) increasing by nearly two percentage points over 2004 to reach 14.3% as at end-2006.The LBO market may be regarded as fairly diversified in terms of invested funds by industry. The telecom industry accounts for the largest amount of invested funds, while five other major industries account for a roughly equal share of total invested funds (see Chart B). The industry diversification has increased significantly since 2005, when nearly half of total invested funds went into the telecom, cable and chemical sectors. Chart C LBO sources of proceeds, 2006(percentages)Chart D Bank loan structure of LBOs(percentages)Source: Standard and Poor’s.other sources1.9%common equity17.4%rolloverequity1.5%preferredequity1.0%shareholderloan11.5%vendornote0.7%2nd-liendebt3.2%bankdebt50.1%bridge loan/publichigh yield1.4%mezzaninedebt10.0%secureddebt1.1%Source: Standard and Poor’s.0153045600153045601998 1999 2000 2001 2002 2003 2004 2005 2006revolving creditterm loan Aterm loan Bterm loan Csecond lienChart A LBO – Issuer country diversification by loan volume and deal count, 2006(percentages)Chart B LBO diversification by industry (in loan volume), 2006(percentages)Source: Standard and Poor’s.01020304050607080901000102030405060708090100ItalySwedenNetherlandsGermanyLoan volumeDeal countUKFranceothersbuildingmaterials4.4%retail5.5%healthcare10.5%chemicals8.9%food &beverage10.8%cable11.1%other25.9%services &leasing9.0%telecom14.0%Source: Standard and Poor’s.
14ECBLarge banks and private equity-sponsored leveraged buyouts in the EUApril 2007In 2006, bank debt remained the main source of funds for LBO transactions, accounting for half of total LBO proceeds (see Chart C). The bank loan structure of LBO transactions in Europe may, however, still be regarded as fairly conservative. In fact, senior tranche A debt accounts for around 23% of the total bank loan structure – a considerably higher share than in the US market, where senior tranche A debt accounts for merely 0.8% of the total bank debt to LBOs. The strong competitive pressure in the EU’s LBO market has increased the risk appetite of potential creditors, as manifested by the increasing proportion of riskier debt in LBO transactions (see Chart D). Nevertheless, despite an increasing proportion of riskier debt, the average three-month rolling spread for senior tranche B and tranche C debt is trending
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