Debt-fuelled takeovers boom set to eclipse European listings – Financial Times

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Bankers are ready for more large leveraged buyout deals, including a €4.3bn buyout of the German generic drugmaker Stada © FT montage; company

A boom in debt-fuelled takeovers is set to eclipse money raised on European stock markets this year for the first time since the eve of the last financial crisis.

A glut of cheap high-yield debt has seen European companies with a market value of $30.8bn bought out by mostly private equity groups compared with $34.5bn of new money raised in European stock market listings, according to data from Dealogic.

This ratio of mostly borrowed money being used to take out of public markets in Europe compared with money investing in new listings, the highest since 2008, has been powered by red-hot demand by investors for riskier bonds and loans.

Soaring demand for yield at a time of low interest rates has allowed buyers of companies to raise €85bn in European leveraged loans over the first three quarters of this year, according to data from S&P’s LCD, outpacing the €71bn for all of 2016 and the highest level since 2007.

Daniel Rudnicki Schlumberger, co-head of leveraged finance origination in Europe, the Middle East and Africa at JPMorgan, said the large amounts of money private equity groups had available to spend meant that more take-privates were likely to happen in Europe.

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“With a substantial capital overhang and still-limited large scale M&A-related transaction flow, private equity funds are actively looking at take-private opportunities even at a larger scale.”

A significant new source of lending for highly leveraged financing used to fund a renewed boom in buyouts has been institutional investors such as pension funds, which in their search for higher-yielding assets are investing large amounts of money in these riskier loans directly. Such has been their demand that institutional funds have started to rival the buying power of European CLOs, structured investment vehicles that buy loans.

This glut of money has meant private equity firms have been able to raise the leveraged loans and junk bonds that back their acquisitions at record low yields this year, while also including aggressive terms that hand them more flexibility to load businesses with even more debt in future.

While European public equity has rallied over the past two years, this has not discouraged private equity buyers from using even cheaper debt to take companies private, mirroring activity in the US where last year $50.8bn of companies were taken private compared with $24.2bn of new stock market listings.

The average yield on Bank of America Merrill Lynch’s euro high-yield bond index has fallen to just 2.3 per cent, down from a level of above 6 per cent at the start of 2016, while the earnings yield of the Stoxx 600 index stands at 4.4 per cent.

Bain Capital and Cinven last month sold a €2.8bn debt package backing their €4.3bn acquisition of German generic drugmaker Stada, the largest leveraged buyout of a European-listed company in four years.

The deal is set to be eclipsed by an even bigger take-private transaction, as Hellman & Friedman has recently launched a $5.3bn (DKr33.1bn) takeover of Nets A/S, Scandinavia’s largest payments processor.

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