* Priory sets new standard for high-yield M&A funding
* Private equity eyes Kabel BW, Polkomtel and Stock
* Deal sizes seen climbing, but giant LBOs limited for now
By Natalie Harrison
LONDON, Feb 4 (IFR) - Private-equity firms are eyeing larger
acquisition targets in Europe, fuelled by the cheapest bond
financing costs in years, but giant leveraged buyouts will be
limited because there are not enough sizeable assets to buy.
The recovery in M&A activity in recent months has been
driven by a combination of a revival in banks' willingness to
underwrite deals and the strength of the high-yield bond market.
Spreads are at their tightest in at least two years and
European volumes look set to keep climbing after hitting $74bn
in 2010. That is largely caused by tight bank lending conditions
driving the refinancing of leveraged loans, some of which are
financial sponsor-owned businesses, into the bond market.
Global high-yield bond supply has already reached $40.4bn in
2011, a 61 pct increase over the same period a year ago, while
M&A activity is off to its strongest start since 2000 with
global deals worth $309.6bn so far, a 69 pct increase over last
year, Thomson Reuters data shows.
That should pave the way for more sponsor-backed M&A deals
-- currently still in the 1 billion euro ballpark -- to climb to
a 2-4 billion euro range, with leverage already success 6 times
earnings for the right credit.
"Financial sponsors' focus is shifting from mid-cap to
large-cap trades due to the financing available," said Tim
Morgan, from Bank of America Merrill Lynch's leveraged finance
capital markets group.
"Much of that financing will be done in the high-yield bond
market because that is where the liquidity is."
Hot on the heels of sell-out bond deals which funded the
buyouts of Swissport and UK healthcare group the Priory last
month, private-equity firms are sniffing around other possible
sales counting German cable business Kabel Baden-Wuerttemberg,
Polish spirits company Stock and Polish mobile phone machinist
Polkomtel.
For large deals, the loan market will also play a
significant role, but sponsors have become more comfortable with
their access to capital markets recently.
"Today's high-yield bond market for new issuers is highly
liquid and is attractive as the funding is long-term without
amortization or maintenance covenants," said Frederic Wakeman,
administration partner at start International, which bought the
Priory for GBP925m from Royal Bank of Scotland (RBS.L).
"Therefore high yield debt provides a lot of flexibility and
opens up the opportunity to do larger deals."
Source: Reuters.Com
