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European leveraged loan pipeline running dry

[LONDON] Europe's leveraged loan market is digesting around €18b (S$27.2 billion) of new paper, providing a fillip to what has been a quiet year, but once those deals have passed the pipeline looks sparse, prompting concern among bankers that are coming in 40 per cent-50 per cent under budget.

A number of public-to-private deals has kept the market busy, including £972m of leveraged loans backing the buyout of UK car auctioneer BCA Marketplace and €963m of loans for Madrid-based theme park operator Parques Reunidos.

Some £3.8b-equivalent of debt backing the take-private of UK theme park and attraction operator Merlin Entertainments is also due to hit the market shortly.

Investors are anticipating US$3b-equivalent of debt backing advertising and public relations company WPP's data analytics unit Kantar and £2.517b of loans for Advent's buyout of UK defence and aerospace group Cobham.

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The acquisition of French call centre business Webhelp by Groupe Bruxelles Lambert and founding shareholders is also expected to come to market, totalling around €1.4b of debt financing.

"The market is okay at the moment as deals are being done but the fear is that the cupboard is bare," a capital markets head said.

The M&A pipeline is sparse. The market had anticipated some jumbo financings for companies including Bayer's animal health division, but that fell out of sponsors' hands and the European leveraged loan market when US animal health and food-animal production company Elanco agreed to acquire the business.

A jumbo financing backing a potential €12b-€17b sale of Thyssenkrupp's prized elevator division is on most banker's radars but it is unclear whether the unit will go to private equity or trade.

With so much uncertainty, investors are eagerly pursuing the deals in market, nervous there will be little to invest in after October and leading investors to bid competitively for paper.

"Even though there are a lot of deals in the market investors are keen to play as they are not sure where the next deals are coming from. While it is not a feeding frenzy, there are plenty of beasts at the watering hole," the capital markets head said.

With banks coming in 40 per cent-50 per cent under budget and a lack of future deals, some have already started to play around with headcount or changing roles. This is expected to intensify towards year-end.

"There is €17b-€18b to get through the market by October but after that deals are few and far between. It feels like it has been a tough year that will probably play into reductions on headcount. We are already seeing a change in appetite from banks and some big departures," a second capital markets head said.

The market could also see a string of repricings as borrowers that priced deals at 400bp-425bp earlier this year seek to reduce their costs by around 50bp to aline with current levels.

"The expectation is that pricing will come in and, if that happens, a lot of deals that were done earlier this year will then be up for a repricing," the first capital markets head said.

REUTERS