Average deal sizes across syndicated loans and high-yield bonds in Europe are at a record high, as investors focus on large cap borrowers and direct lenders take a larger portion of the financing market.

The shift in average deal sizes shows how the makeup of the European market has changed since the global financial crisis more than a decade ago. “European loans are focused on deals from big cap borrowers who tend to be among the top three in their market,” said one manager. “This makes our market better able to withstand another crisis,” he added.

The average European deal size across both bonds and loans has increased steadily since 2012, and is now well above the pre-crisis high of $739.8 million, reaching $856 million by the end of 2021.

These increases have not just come through a small number of "super-jumbo" transactions, either. The median deal size of institutional term loans in Europe in 2021 was €565 million, according to LCD, while the (mean) average was €687.1 million — both record highs. Jumbo deals accounted for 20% of total volume in 2021, which is the largest percentage for any year since 2008 — even if this share came in the absence of a significant number of mega-sized deals. The region's largest financing of 2021 was the €2.4 billion loan and €1.35 billion two-part bond financing from T-Mobile Netherlands B.V., which did not even make the top 20 of global buyout deals.

But smaller deals are becoming less common in Europe and loan tranches of below €499 million made up 41% of supply in 2021. This is the lowest such proportion on record, while deals below €250 million accounted for just 8% of the market last year, well below the previous low of 15% set in 2020.

Direct-lender competition

So, what has driven this change? In the first instance, direct lenders are a permanent feature of the market today in a way that simply didn't exist before the global financial crisis. These lenders have significant cash to put to work, with the largest funds able — and increasingly willing — to offer tickets of €1 billion or more. But while jumbo unitranches of this size may grab the headlines, the core business of debt funds remains companies with EBITDA of €20 million to €50 million and a debt requirement of €100 million to €500 million. The upper part of this range was previously very much the preserve of the syndicated markets.

This competition has not dented growth of the syndicated markets, where volumes last year either tested or pushed through pre-crisis levels. Overall, European borrowers issued a record of €254.8 billion in loans and bonds through 2022. Institutional loan volume reached €111.7 billion, just topping 2007's tally of €111.1 billion, although total loan volume still lagged that year, as pro rata debt was higher in 2007 at €54.4 billion, compared with €18 billion in 2021. Total bond issuance did set a record in Europe, however, at €125 billion.

The growth in the overall markets means investors can concentrate on larger trades. As such sources explain, some syndicated lenders are becoming more wary of going too far down the size spectrum with more looking at a rough cut-off point of €500 million, whereas that cut-off may have been €200 million to €300 million previously. “We are in the business of secured lending to large cap European corporates,” explained one fund manager.

Bankers agree, noting that much of Europe's CLO investor base is purely focused on participating in larger-ticket deals that have a lender group big enough to ensure decent secondary liquidity. “It can be hard to get mainstream CLO investors' interest in a smaller, more storied credit,” said one banker at a top-tier arranger. Sources add this reticence comes in part from buyers of CLO liabilities who want to ensure the underlying assets come predominantly from top-tier proven names.

Price flexes

Indeed, of the trickier syndications in the second part of 2021 that resulted in a meaningful upward price flex, the lion's share came from deals below €500 million. Taking the market from September, Inovie and Aggreko were the only deals of more than €500 million to move pricing up during syndication (out of nine upward flexes), and for Inovie even then the final move was a relatively minor tweak of 25 basis points across the ratchet. This gave a starting margin of E+400, with the offer price settling at the tighter end of guidance at 99.25.

More typical were deals such as IU Group, Ten Cate, Bruneau and The Cookware Company — some of which required a significant price adjustment to clear the market. The Cookware Company Europe BVBA, for example, priced its buyout term loan at E+487.5 with a 0% floor offered at 96.5 for a yield of 5.66%, from talk of E+450-475 with a 0% floor at 98.50. Sources note that once yields move closer to 6% then loans attract a wider investor base away from CLOs, and in this case it allowed Cookware to allocate with a modest €4.5 million increase at €348 million.

Such levels are still generally below unitranche pricing, however, and bankers say that many sponsors still lean towards a public market deal where possible, given the price differential and the fact that documentation is typically more borrower-friendly in a syndicated financing. Moreover, not all smaller deals struggle and some last year — such as the €375 million term loan from S4 Capital — cleared the market with a price tightening.

That said, direct lenders are becoming competitive in various areas and now regularly offer cov-loose facilities. As such, bankers admit more-storied credits could well find an easier reception from private lenders. "The sweet spot for private lenders remains smaller borrowers with a credit story that needs a deep dive," said one banker.

Leverage spotlight

Direct lenders can also take a view on other areas such as leverage, although there are signs that multiples here are starting to creep up across syndicated markets. LCD data shows total leverage for European loan transactions rose slightly in 2021 to 5.47x, from 5.34x in 2020, through it remained below the 5.95x multiple recorded in 2007.

First-lien leverage remained at an all-time high of 4.83x, marking a post-crisis structural trend that has not disappeared. Total leverage for sponsor-driven deals was slightly lower at 5.73x, compared with 5.83x in 2020, while total debt-to-EBITDA for buyouts was fairly steady at 5.82x, compared to 5.85x in 2020.

The depth of dry powder from direct lenders and a private equity market still firmly on the M&A trail suggests that the split between average deal sizes could widen further. And even if markets struggle to match last year’s volume levels, with private equity or leveraged corporates running an acquisitive eye over such targets as Telecom Italia, BT Group or Boots, Europe may yet break more deal-size records in 2022.