Private equity groups awash with debt offers
Peter Smith, FT Syndication Service
LONDON: Banks are encouraging UK private equity groups to take on excessive levels of debt in buy-out transactions, according to a survey published recently by Close Brothers Corporate Finance.
Ninety per cent of UK mid-market private equity groups polled said they regularly or occasionally took on less debt than was offered by the banks, with only 10 per cent saying they never turned down the debt packages.
The European debt market is awash with cash from a new generation of investors, including hedge and specialist debt funds and foreign banks, who are hungry for the type of yields available in leveraged finance.
Private equity groups, also sitting on large amounts of capital after an unprecedented fund-raising drive, are increasingly buying assets with the help of aggressive debt packages.
According to Standard & Poor's, the rating agency, the average multiple of ebitda as a proportion of debt rose to 5.6 times. That compares with a multiple of 4.2 in 2002.
Chris Masterson, head of Montagu Private Equity, warned there could be dangerous times ahead.
"I have never seen debt multiples as high as they are now and I have followed this market since 1980."
Mark Barrow, head of private equity at Close Brothers, commenting on the survey, believes the structural shifts in the debt markets are here to stay.
"I believe the multiples will come down led by the retail and consumer sectors. But I think that it will be a soft landing rather than a bump."
Some LBO deals are already struggling, notably retailers Focus, Ethel Austin and Maplin Electronics.
The debt package sold to fund the leveraged recapitalisation of Debenhams has also had problems, a reflection of the multiple applied to refinance the business and the large dividend payments taken out of the business by its private' equity backers.
The survey also found that private equity groups were now more relaxed about pension issues.
Fifty-six per cent said they would invest in a company with a defined benefit scheme whether in deficit or surplus.