This briefing note is informed by analysis of the transactions on which we advised during 2018, together with other publicly reported transactions and market data.
The glut of liquidity that has defined the leveraged buyout (LBO) market over the last 3-4 years continued into 2018, allowing borrowers to drive the market by increasing available leverage and generally securing favourable documentary terms. In a year which was shaped by increasing turbulence in Westminster as Brexit drew closer, we saw a healthy debt issuance in the UK and across Europe, including a number of opportunistic refinancings.
Market overview, liquidity and leverage
Whilst the loan markets remained in rude health in 2018, total debt issuance across Europe nudged down by 4% on the stellar levels of 2017. Although the LBO market was in fine health, refinancings were down by around 19% compared with 2017. Sponsor related dividend activity fell by around 70% in 2018 to €2.5 billion, bringing it more in line with the volumes seen in recent years other than the standout 2017. However, these trends appear to be principally attributable to the fact that a large number of more attractive borrowers have already taken the opportunity to refinance in 2016/17, rather than because market conditions have tightened.
Buyout activity represented 71% of the total European issuance, making it the busiest year for such activity since 2007. A principal driver for this increase in M&A issuance has been larger deal size rather than an increase in volume, with 2018 witnessing average LBO sizes swell to a record €691 million, up from €447 million in 2017 and €353 million in 2016.
Leverage continues its inexorable march northwards with first lien leverage across all deals hitting an all-time record of 5x (the highest level since records began in 2001). LBO financings reached an average total leverage of 5.5x (the highest level since 2007), and deals leveraged at 6x or higher accounted for 37% of total issuance, the greatest proportion since the 51% recorded in 2007. However, average equity contributions also rose from 44% in 2017 to 48% in 2018, reflecting high purchase multiples.
First lien leverage hit an all time record of 5x and deals leveraged at 6x or higher accounted for 37% of total issuance