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THE EXPERTS' VIEW |
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| March 2007 - Calyon, a leader in acquisition finance |
Investment funds have become major factors in the business world and Calyon considers them to be high-priority clients, offering them a broad range of services from financing solutions through to capital markets products and equity-related transactions. "Calyon's success in the buyout market has enabled us to carve out a position as one of the banks that is most highly regarded by these clients," says Jacques de Villaines, head of the Leverage and Financial Sponsors Group.
Calyon led the French buyout market in 2006 and has been a bank to be contended with in acquisition finance for several years. Backed by its dedicated global staff, Calyon had an outstanding year and was named Mandated Lead Arranger (MLA) in last year's three largest primary market deals in France - Europcar, Elior, and Pages Jaunes. As François Pasquier, head of Leverage Finance Europe, explains, Calyon is pursuing ambitious goals elsewhere in Europe and wants to establish a European franchise similar to those of the major US and UK banks.
 LBO, the debt-financed acquisition of a target company
An exploding market
Calyon, recognised expertise in acquisition finance
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 LBO, the debt-financed acquisition of a target company
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- A technique that originated in the US
The Leveraged Buy Out (LBO) technique originated in the US in the early 1990s. It received a boost from insurance companies and pension funds which at that time had abundant funds available to invest in corporate acquisitions.
At the same time, major industrial companies were confronted with the need to pay down debt, and preferred divesting struggling units rather than attempting to restructure them in depth. With the stock markets sluggish, industrial companies reluctant to make acquisitions and a rising number of target companies on sale, LBO transactions increased substantially over the decade.
The first LBOs were highly successful and the phenomenon spread first to the UK and then to continental Europe. Jacques Pochon, the head of Leverage Finance France, points out that with a 15%-to-25% return on the equity invested, LBOs largely outperform money market and bond products. Investment funds with very large amounts available to finance the equity component of these acquisitions now compete directly with corporate in acquiring companies.
The use of this technique has gradually grown with the emergence of increasingly sophisticated debt products, in particular mezzanine, senior and junior debt which make it possible to apply leverage to a greater degree.
- Sophisticated financing solutions
The investment funds interested in acquiring a target company are betting on the company's value and potential for growth. Acquisition finance solutions aim at maximising the amount of borrowings relative to the equity invested in these deals. The resulting debt structure often comprises several tranches, each with specific repayment terms, and an intermediate (or "mezzanine") layer that is midway between equity and borrowings.
The following distinctions are made:
- senior debt,
-subordinated debt.
Investment funds work to maximise the leverage effect of the debt whose repayment is directly tied to the target company's cash flow generation capacity. Lenders offer financing solutions that have become increasingly sophisticated in order to facilitate the completion of transactions and make as good a fit as possible with the target company's situation. The latest innovation involves so-called "stapled" loans offered either by a bank close to the target company or by the bank advising the seller to the funds that are buying the company.
An exploding market | |
- Europe
The European buyout market was exceptionally active in 2006 with deals totalling USD 234.8 billion (La Tribune 21 December 2006), almost 54% more than in the previous year.
Senior debt levels remained relatively stable while mezzanine loans grew substantially. The market was awash in cash from banks, CDO funds and institutional investors, and saw an increase in refinancing deals taking the form of secondary buyouts.
The chemical industry, followed by telecommunications, was among the best-performing sectors in the buyout market (according to S&P's LCD and Eurostat, July 2006)
- France
The French buyout market has been growing steadily since the early part of the century. Between 1997 and 2000 just three deals exceeded EUR 1 billion, whereas today such deals are considerably more commonplace.
At the same time, there has been a sharp increase in the number of buyouts worth more than EUR 200 million and a falloff in smaller deals (those between EUR 75 million and EUR 200 million).
In 2006, the biggest deals in France involved Europcar, Elior, and Pages Jaunes, which at EUR 6 billion remains the largest buyout ever completed in France.
Liquidity has been flooding into the buyout market. Investment funds are able to raise money on excellent terms and in 2006 continued to drive an M&A market featuring increasingly large deals. These funds have become players to be reckoned with. In six years, they have increased funds raised in Europe by a factor of 6.5. As Laurent Chenain, deputy head of Leverage Finance France, points out, they have huge amounts of money available for investment. Last year, according to Dealogic, deals led by these funds totalled USD 737 billion.
"With the M&A market unable to satisfy the funds' appetites, the volume of secondary buyouts has steadily increased while the length of time funds hold their assets has been constantly decreasing. Moreover, given the size of the latest so-called "jumbo" funds raised by the industry's leaders (KKR, Goldman Sachs and Blackstone), it is likely that we will see bigger and bigger deals involving SBF 120 and CAC40 companies. Until now investment funds have not staged any hostile bids but it is possible that the flood of money they have raised will provoke a change in their strategy in the future," says Laurent Chenain.
This flood of cash has been accompanied by the growing sophistication of buyout financing arrangements, aimed at meeting investors' changing requirements. One of the results has been that the A tranche has been pre-empted by banks since it is amortisable and now accounts for just 25% to 33% of senior debt, compared with 50% just a few years earlier. The B and C (and occasionally even D) layers are now mostly subscribed for by institutional investors.
In addition to low interest rates and funds' investment capacity, the market has been stimulated by the determination of banks and other financial institutions to take advantage of the returns available on this kind of investment, which are much more attractive than those on traditional corporate financing transactions.
This "surplus liquidity" in terms of shareholders' equity and bank debt has done its part to keep prices at a high level, a situation suggestive of a financial bubble, with prices unrelated to to target companies' real value. "In a context of fierce competition between banks, it has become essential that they assess risks accurately and keep a close eye on the risk/return profiles of proposed deals," explains François Pasquier.
Calyon, recognised expertise in acquisition finance | |
Calyon's Leverage and Financial Sponsor Group (LFSG) comprises 80 finance professionals around the world. While it has a particularly strong presence in Europe with a total of 60 people based in the United Kingdom, Germany, Italy, Spain and France, LFSG also operates in Asia, Australia and the United States.
According to Dealogic, Calyon was the leader in acquisition finance in France in 2006 (1st Bookrunner in transaction volume), as it had been in 2005 (according to Option Finance). Calyon was ranked second in 2004 and 2003 and third in 2002 by Capital Finance.
According to Thomson Financial (Capital Finance - 05/02/2007), Calyon is ranked 1st MLA and 2nd Bookrunner in LBO debt in France in 2006, and 8th Mandated Arranger in Western Europe - LBO/MBO.
Calyon was also awarded "LBO lender of the year 2006" by Private Equity Magazine (January 2007).
- Highly competent in the United States
Calyon has developed close relationships with many funds in this highly competitive market that continues to be the most advanced in the world, and is especially active in the middle-market segment.
Calyon is one of the leading banks in the Asian market which, although still small, is booming.
Read about Calyon's major Asian deals in Acquisition & Leveraged Finance in 2005-2006.
- Solid track record in Europe
Calyon has leading positions in several European countries and has stood out in many transactions.
- In 2006 in the United Kingdom, the largest buyout market in Europe and traditionally dominated by US and UK banks, Calyon won several MLA assignments, most notably for the Iglo deal.
- In Italy, Calyon was involved in one of the year's biggest deals as the MLA in a EUR 1,150 million financing transaction for Avio.
- Calyon is also recognised as a significant player in Spain, and acted as the MLA and Bookrunner for BAA in a deal involving senior debt of GBP 6,970 million and subordinated debt of GBP 2,000 million.
As the leading bank for buyouts in France, Calyon had the largest transaction volume as Bookrunner in 2006 (according to Dealogic) and also won MLA assignments on the three largest primary market deals of the year:
- Calyon was the only French bank to take part in the EUR 6 billion financing used for the acquisition of Pages Jaunes, in a deal put together by KKR and Goldman Sachs PE and the largest buyout ever in France,
- Calyon won Joint Bookrunner and Joint Lead Arranger mandates in the public bid to take over Elior that was launched in May 2006 by its chairman Robert Zolade with the backing of the UK fund Charterhouse and France's Chequers Capital,
- Calyon was also appointed MLA and Bookrunner in Eurazeo's EUR 3.4 billion acquisition of Europcar International.
Calyon's Leverage and Financial Sponsors Group, which is responsible for the coverage of investment funds, works closely with the bank's business lines (ECM, Capital Markets, M&A, etc.) to promote the full range of its products and offer sophisticated financing solutions suited to all types of buyout. These units include:
- syndication – most LBO financing arrangements are syndicated with several financial institutions,
- debt issuance – Calyon has a specialised unit to structure high-yield issues. For Eurazeo's purchase of Europcar International, Calyon arranged EUR 550 million of the acquisition financing in the form of high-yield bonds,
- securitisation – this technique is used in buyouts as a substitute for traditional senior and mezzanine debt and involves issuing securities backed by the company's tangible assets.
Our goals:
- strengthening our relationships with sponsors,
- offering more and more innovative solutions (securitisations, public-to-private deals, recapitalisations, etc.),
- maintaining outstanding margins.
"We have serious ambitions at European level. We intend to stay at the head of the league tables in France and among the top ten in Europe," sums up François Pasquier.
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