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European leveraged finance: From survive to thrive
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M&A financing keeps the leveraged finance market beating

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A backlog of deal-making coupled with a pent-up supply of credit, intriguing targets in a range of sectors, a better sense of the impact of the ongoing pandemic on these businesses and good prices being achieved—meant that the situation was ripe for a surge in deals

 

HEADLINES

  • European leveraged loan issuance for M&A (excl. buyouts) climbed 19% year-on-year, reaching €54.9 billion in 2021 
  • High yield bond issuance for deals jumped to €17.8 billion in 2021, a 53% gain on 2020 
  • European M&A deal value came in at US$1.3 trillion in 2021—just shy of the record set in 2007 (US$1.4 billion)

A rebound in European corporate transactions has driven a double-digit acceleration in leveraged finance earmarked for M&A (excl. buyouts), with a robust pipeline setting the stage for an active 2022. 

In the summer of 2021, many businesses put their house on the market, so to speak, in some cases having hesitated for years. COVID-19 had already hit pause on many M&A plans in 2020 so, when corporates that had held off selling realised that their competitors were being more bullish and attracting good prices, they jumped in with both feet. 

Mega-transactions played a significant role in this rising tide of activity, such as the €24.8 billion merger between German real estate groups Vonovia and Deutsche Wohnen. Big inbound plays for European assets by US buyers were also on the menu, including Parker Hannifin’s €8.4 billion take-private of UK aerospace and defence group Meggitt, whetting investor appetite for big-ticket European corporate M&A.

At the same time, lenders were in a better position to assess the resilience of businesses after 18 months of the pandemic and were looking for a home. They had a greater degree of comfort identifying the right credits and put their money to work.

There was also an opportunistic element at play in this uptick in deals. Companies that had done unexpectedly well during the pandemic or sectors that were inundated with new business became attractive targets. Logistics companies and warehousing firms found themselves at the frontlines as more people shopped online and delivery became an essential service. Pharma companies, from vaccines to testing operations, were suddenly in the spotlight. 

These factors—a backlog of deal-making coupled with a pent-up supply of credit, intriguing targets in a range of sectors, a better sense of the impact of the ongoing pandemic on these businesses and good prices being achieved—meant that the situation was ripe for a surge in deals. 

According to Mergermarket data, Western European M&A deal value to the end of Q3 2021 was already higher than the annual total of any year since the global financial crisis. By the end of 2021, it had reached US$1.3 trillion—far surpassing the US$768.3 billion in deals secured in 2020 and within reach of the all-time high-water mark of US$1.4 billion recorded at the peak of the market in 2007.

 

M&A uplift boosts debt pipelines

This spike in deal activity has spurred year-on-year growth in both leveraged loan and high yield bond issuance for M&A, as corporates took advantage of a range of options to finance the flurry of strategic activity. 

In Western and Southern European leveraged loan markets, issuance for M&A loans (excl. buyouts) climbed by 19% year-on-year, reaching €54.9 billion in 2021. And much of that activity took place towards the end of the year: July, August and September 2021 were three of the four biggest months for non-buyout M&A loan issuance. 

High yield bond financing for corporate M&A (excl. buyouts), meanwhile, followed a similar upward trajectory in the region, reaching €17.8 billion for the year—up 53% on 2020.

Many sellers hitting the markets at the time were still doing so cautiously, hoping to avoid entering an overcrowded market with a limited number of increasingly selective investors. A company considering a massive deal did not want to miss out on potential investors. Timing was and is everything.

These are valid concerns and shareholders have been patient  so far, but corporates will not be able to sit on cash piles indefinitely. In addition to dividends and share buybacks, M&A will remain a key tool for deploying excess liquidity

 

Second half surge

Issuance linked to M&A activity picked up where the high volume of refinancing activity left off, keeping the market ticking over at a healthy clip to the end of the year. Borrowers came to market early in 2021 to pre-emptively refinance existing credits at the low prices available in the market. 

With loan and bond pricing moving higher as the year progressed, however, appetite for refinancing ebbed. The fact that many borrowers had already done their business earlier in the year was a further contributor to this slowdown in demand.

M&A activity was an inevitable next step for companies seeking to divest, streamline their portfolios and focus on their core business. This benefitted M&A issuers that were able to gain more traction among syndicating banks and investors that had the bandwidth to consider new money opportunities.

Spain’s fourth-largest telecoms operator MÁSMÓVIL, for example, raised in excess of €2 billion from high yield bond markets to fund the acquisition of Basque rival Euskaltel, while pan-European healthcare group Cerba inked a €500 million package of secured and unsecured bonds to fund the purchase of clinical testing laboratory Lifebrain in October. French auto components supplier Faurecia, meanwhile, issued a five-year €1 billion sustainability-linked bond to fund its €6.7 billion purchase of German peer Hella.

 

Corporate cash piles 

While corporates upped their M&A activity in 2021, strategic buyers remain somewhat cautious—many have not yet ventured to market. According to S&P Global, cash and other liquid instruments held by corporates globally climbed to a record US$6.84 trillion in 2021—45% higher than the pre-pandemic five-year average.1

Concerns around rising US and European COVID-19 case numbers due to the Omicron variant have seen corporates hang on to cash reserves, shielding themselves in the event of another round of restrictions.

At the same time, any rise in interest rates will be scrutinised by buyers and lenders alike, as it could impact deal activity significantly. If inflation continues to put pressure on margins and rates rise through the year, this burst of M&A activity may be dampened by the end of 2022. 

These are valid concerns and shareholders have been patient so far, but corporates will not be able to sit on cash piles indefinitely. In addition to dividends and share buybacks, M&A will remain a key tool for deploying excess liquidity.

After a burst of activity in 2021, expect M&A markets to remain busy for the first half of the year at least, providing lenders with a strong pipeline of opportunities well into 2022.

 

1 "Companies Are Hoarding Record Cash Amid Delta Fears". Anna Hirtenstein. 16 Aug 2021. The Wall Street Journal.

 

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European leveraged finance: From survive to thrive

 

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