Private Equity (PE) houses are increasingly turning to asset-backed finance as a way of reducing the burden of expensive senior debt and improving liquidity in the wake of Leveraged Buyouts (LBO), according to new research from Demica. Over 60% of top PE organisations stated that securitisation is becoming a more important source of replacement capital to ease debt repayment schedules and respondents estimated that a significant proportion (12%) of deals already employ trade receivables securitisation.
The Demica study encompassed both primary and secondary research, including interviews with 40 top European PE firms to ascertain views on the role of securitisation as a post-LBO financing tool. Given the current surge in LBO activity, the cost of debt burden is a growing issue for LBO firms. The majority (57%) of respondents felt that leveraged finance would become more expensive over the next two years; and two thirds pointed to a consequent focus on the terms of âcarve outâ provisions in buy-out financing agreements, building in the flexibility to accommodate future alternative financing structures.
Interestingly, 62% of survey respondents stated that the role of securitisation in providing alternative sources of liquidity and its impact on amortisation/repayment schedules was becoming increasingly important. They estimated the proportion of post-LBO transactions to be using securitisation today to be some 11.9%, rising to 16.3% by the end of 2006 â a growth rate of 37% in the use of post-LBO securitisation over the next two years.
Alex Gress, Vice President at J.P. Morgan Securities, comments, "There is a convergence in the market between investors and portfolio companies for financial sponsors looking to complete securitisations to satisfy a strategic objective. That objective may be to lower funding costs or put in place non amortising term debt structures. Relative to AAA credit card or mortgage backed paper (that is 60% plus of the structured finance supply in Europe), this type of corporate asset-backed paper offers investors a strong spread pick up compared to what they're currently seeing in the market, so there is significant demand. The convergence of issuer objectives and investor demand will continue to fuel a growing trend for these types of deals â satisfying a demand that currently exceeds supply."
Brian Feighan, Executive Vice President at Demica, adds, âThis research confirms the trend we have witnessed over the last 18 months â corporations that have undergone a leveraged buyout are under substantial financial pressure and their PE shareholders are urgently seeking ways to stabilise their capital structures and diversify the funding mix. Executing a trade receivables deal requires a widely distributed debtor book evidenced by low concentrations and performance characteristics in terms of ageing, dilutions and write-offs. Although best suited to larger transactions (typically >â¬250m of gross receivables) the benefits are proving too beneficial for financial sponsors to overlook. Funding cost savings of 100-150 basis points are typically achievable when compared with the cost of normal senior debt.
"Equally important is the ability to refinance early amortising senior debt with a softer amortising or renewable facility which significantly eases the cash flow burden. Flexible structures in trade receivables securitisation also ensure that both the term and the funding amount can be optimised to best suit the exit strategy of the financial sponsors."