European Leveraged Lending Boom to Continue

But Doubts Remain about the Sustainability of the Market and Investors are in for a Surprise According to New Survey

London, July 12, 2007 ... Ninety-seven percent of key participants in the European buy-out market believe the current bull run of sponsored acquisitions will continue for at least the next six months, with the same figure thinking leveraged lending volumes will either continue to increase or remain steady during the same period, according to a new survey conducted by White & Case and In-House Lawyer magazine. The survey polled senior figures at leading banks, which were bookrunners for over $60 billion (more than half) of all 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 addition to predicting continued high levels of activity in the market, seven out of 10 respondents believe that there is room for further increases in the debt multiples being employed in European buy-outs. The UK, Germany and France, in that order, are pinpointed as the markets that will be the most active in the next six months, with Consumer Products and Services leading the way as the sector most frequently predicted to be the most active during the same time period.

However, when asked if they thought the current nature of the European leveraged finance market was unsustainable, 59 percent of respondents agreed that it was, with more than three-quarters (79 percent) of this figure believing the bubble would burst in six to 12 months' time.

"The market continues to be really interesting," commented Mike Goetz, co-head of White & Case's London-based European leveraged finance team. "We've seen unprecedented levels of lending and sponsors are continuing to drive M&A activity throughout the US, right across Europe and now into Asia. The convergence of investors, high levels of liquidity and extremely competitive situations result in a dynamic market that is in a constant state of change. However, like all bull runs, there will have to be a slowdown at some point. What is unclear is when this will happen, what will trigger it and how rapidly the brakes will be applied. It's unknown whether the current market turmoil, which has been more acute in the US than in Europe, is simply a correction or the beginning of something more serious."

Interestingly, the research reveals a divergence in opinion between lenders, sponsors and turnaround specialists on the sustainability of the leveraged lending market. Investment bankers are far less circumspect, with only 36 percent believing the market is unsustainable, but a clear two-thirds majority (67 percent) of sponsors believe this to be the case. Unsurprisingly, turnaround specialists are the most hawkish, with nine out of 10 (91 percent) taking this view.

The research also shows that many of the sponsor-friendly terms in the leveraged lending market that have developed during the current boom are here to stay. 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 all deemed by respondents as likely to remain if the market turns. Three-quarters of respondents believe reverse flex on loan pricing, which was unheard of in Europe three years ago, is now here for good.

"The market is evolving at such a rapid pace that changes happen on an almost daily basis," added Goetz. "New developments migrate across products and structures, back and forth across the Atlantic, and are adopted and become market standards in record time. Three months ago covenant-lite deals were a rarity in Europe, yesterday they were the market norm for many, if not most, deals and today they are under pressure from investors and market observers. When we conducted the research for this survey, respondents believed that club deals would become more frequent, to allow sponsors to pursue larger targets, but with the emergence of equity bridge financing structures, which negate the need for a consortium in that situation, that view may already be dated."

Respondents are united over the outcome of future restructurings. Ninety-four percent believe that the introduction of so many new financing structures in the market, which are as yet untested in a restructuring scenario, along with the arrival of new market participants, means that investors are going to be in for a surprise in future leveraged buy-out restructurings. Moreover, nine out of 10 respondents think that covenant-lite deals will change the timing and severity of restructurings.

"The growth of high yield, mezzanine and second lien financings in the European market, without historical structural subordination, means there are a lot of structures out there which are untested in various European jurisdictions and which therefore may not behave in line with historical experience. Not only that, but the influx of new players in the market in recent years, in particular hedge funds and other distressed debt investors, will lead to new and different approaches in future restructurings. The next wave is likely to be very different to those at the turn of the last credit cycle," explained partner Dan Hamilton, head of White & Case's Financial Restructuring & Insolvency practice in London. "Moreover, while there are many advantages to covenant-lite loans, one clear doubt is the reduced early warning they provide about companies in distress. With a covenant-lite loan, once the distress flare goes up, it's far more likely that you will be looking at a full-on restructuring rather than any sort of remedial action."

Please visit www.whitecase.com/leveragedfinanceoutlook for a full copy of the survey.

About the Survey Methodology
Senior researchers from In-House Lawyer magazine carried out telephone research in March to May 2007 to poll 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 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. The subsequent report on the findings was drafted by White & Case in conjunction with In-House Lawyer.

About White & Case
White & Case LLP is a leading global law firm with more than 2,000 lawyers in 35 offices in 23 countries. Our clients value the breadth and depth of our US, English and local law capabilities and rely on us for their complex cross-border commercial and financial transactions and for international arbitration and litigation. Whether in established or emerging markets, the hallmark of White & Case is our complete dedication to the business priorities and legal needs of our clients.

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