From March to May 2007 in conjunction with In-House Lawyer magazine we polled members of the European leveraged finance and private equity community on their views about the future of the European buy-out market.

Detailed responses were obtained from 41 individuals consisting of senior figures at leading banks, which were bookrunners for over $60 billion (more than half) of all the European leveraged buyout loans in 2006, partners from sponsors that account for $30 billion of invested funds, and insolvency practitioners and turnaround specialists from leading firms in the field. In summary, the key findings of the research are as follows:

• The consensus is that European leveraged lending volumes will increase or stay the same over the next six months.
  
• The vast majority of the market thinks there is room for further increases in debt multiples.
  
• Market participants almost unanimously believe that the volume of sponsored acquisitions in Europe, which has risen sharply in the past two years, will continue to grow.
  
• The majority of respondents think the second lien and mezzanine markets will expand as the leveraged finance market grows, although a sizeable portion do think that second lien will take market share from mezzanine.
  
• However, a majority of participants in the market believe that current levels of activity are unsustainable, although there is some divergence in opinion between bookrunners, sponsors and insolvency and turnaround professionals.
  
• Of those who think the market is an unsustainable bubble most think it will burst within a year, but not for six months.
  
• The most likely cause of a downturn in the leveraged finance market is reckoned to be a loss of investor confidence, followed by negative macroeconomic conditions and rising interest rates.
  
• But, in order of concern, the top issues respondents are worrying about most with regard to the leveraged finance market are: negative macro-economic conditions, the emergence of a CDS market for leveraged loans and a potential spike in loan defaults.
  
• The largest European economies will remain the focus for leveraged lending in the next six months. Germany and the UK are predicted to be clear leaders, with France firmly in third place and other European countries some way behind.
  
• In the same period Consumer Products and Services will see the most leveraged lending activity, by some margin, with Business and Professional Services, Energy & Natural Resources and Healthcare tied in second place and Telecoms a close fifth.
  
• Despite the UK Financial Services Authority's recent feedback paper on private equity appearing not to yield specific new rules for the industry, when originally asked if the paper would lead to greater regulation, there was an expectation it would, even if the majority of respondents were opposed to the concept.
  
• If market conditions become less sponsor-friendly, deal terms such as equity cures, structural adjustments on a majority lender basis, mandatory prepayment provisions, 'yank the bank' and 'use it or lose it' clauses, and bridges to take-outs are expected to remain in place. Reverse flex is definitely here to stay.
  
• The overwhelming view is that the current sponsor bias of the market will not damage relationships between sponsors and investment banks.
  
• In descending order, the top three industry sectors voted most likely to experience loan default in the next year are Retail, Heavy Industry and Manufacturing.
  
• The UK, Germany and Italy are listed as the top three countries for likely defaults in the same period.
  
• Opinion is evenly split on whether the leveraged loan market is better equipped to deal with defaults now than five years ago.
  
• But an overwhelming majority of respondents believe that covenant-lite deals will change the timing and severity of future restructurings.
  
• Almost everyone in the market thinks that when the new market structures that have emerged in recent years are tested in a restructuring situation, investors are in for a surprise.
  
• Investment bank distressed debt teams and hedge funds, with the massive financial firepower at their disposal, will be the most influential players in the next wave of financial restructurings.

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For more information, please contact:

James Martin
Media Relations Mgr EMEA, White & Case
44 0 20 7532 2853/ 44 0 7939 012 011

Alexandra Henderson
Media Relations Executive, White & Case
44 0 20 7532 2848