Spanish leveraged finance issuance intended for M&A and leveraged buyout (LBO) deals have slowed in 2023 due to minimal deal flow and increasingly risk-averse banks. Leveraged loan and high yield bond issuance for M&A and LBO deals in Spain saw a steep year-on-year decline in Q1 2023, from US$3.9 billion in Q1 2022 to US$450 million in Q1 2023.
The drop in M&A and LBO-linked financing has mirrored a similar slowdown across M&A and private equity (PE) markets in Spain. Spanish M&A value was down 69% year-on-year in the first three months of 2023, from US$22.4 billion in Q1 2022 to US$7 billion in Q1 2023, while PE buyout deal value dropped 92% during the same period.
Slow M&A drains debt deal pipeline
The slowdown in Spanish M&A and PE deal volume has had a direct impact on lending activity in the country, with lenders waiting for deal volumes and new deal lending opportunities to emerge.
As has been the case across Europe, rising interest rates and macroeconomic uncertainty have hit M&A dealmaking and have dented asset valuations in Spain, leading to a disconnect between vendor and buyer pricing expectations and delays in closing deals.
According to the Argos Index, which tracks deal multiples for private European mid-market companies valued between €15 million and €500 million, deal values dropped 2% to 9.7x EBITDA in Q1 2023, the lowest levels since the initial wave of COVID-19 lockdowns in the first half of 2020. Vendors that were able to secure much higher valuations when selling companies 24 months ago have been reluctant to bring businesses to market now that valuations have softened.
Spain has also experienced the same delays in closing M&A deals that have hit global deal markets. According to WTW’s Q1 2023 Quarterly Deal Performance Monitor, transactions are taking longer to close than at any other time since 2008, with 71% of the transactions now taking at least 70 days to complete, compared with 53% of the deals less than 18 months ago.
Clearing the backlog
The decline in M&A and LBO financing, however, is not entirely down due to weaker Spanish M&A markets—banks have also been slow to finance new deals. While some larger deals have been completed in 2023 (Blackstone, for example, closed a €680 million refinancing deal for Spanish hotel company Hotel Investment Partners in March), inflationary pressures, rising interest rates and tightening liquidity have made major lenders increasingly tentative and more risk averse.
Many key banks in the market are still focused on clearing unsyndicated debt issued in 2022 and are prioritizing the reduction of these exposures before taking on new financing obligations.
For example, the banks that arranged the €6.6 billion debt package to support the €18.6 billion megamerger between telecoms giants Orange and Masmovil Ibercom (announced in July 2022) have been exploring all options to reduce their exposure to the debt and free up balance sheet capacity.
The debt, which in normal market conditions would have been sold down to institutional investors with relative ease, proved more difficult to syndicate than expected as investors demanded higher discounts and became increasingly risk averse and reluctant to buy up non-investment grade paper.
This squeeze on the normal channels for syndication is making Spanish lenders more cautious about taking on excessive syndication risk and prompting many to pare down the ticket sizes they are willing to underwrite, constraining lending capacity in the market.
When lenders have provided new loans, they have tended to focus on existing client relationships and term loan A facilities, which, unlike the term loan B that is sold down to institutions, are held by banks on their balance sheets and have more lender-friendly terms and covenants.
New providers step into the gap
The cautious approach adopted by mainstream banks in Spain has opened up opportunities for other lenders.
The banks that underwrote the Orange/Masmovil financing, for example, have turned to other international banks, including the Bank of China and Industrial Commercial Bank of China, to buy up portions of the loans that would otherwise have been sold in syndication.
Chinese banks have been active in the Spanish market for some time, but have only shown an appetite for smaller deals. Taking up a big slice of the debt in a major transaction like Orange/Masmovil could see Chinese banks become more influential players in Spain.
Private debt funds are also well-placed to gain market share as mainstream lenders step back. Rising interest rates have increased the financing costs of syndicated loan structures and the pricing gap between private debt players and banks has narrowed. Private debt funds, which hold loans on their balance sheets, can also close deals faster than banks, which have to navigate choppy syndication markets.
Additionally, private debt funds are well-established in Spain, with the likes of Ares, Arcmont, CVC Private Credit, Ardian Private Credit and Pemberton among the pan-European managers active in the market. Domestic managers like Oquendo have also developed strong platforms for lower mid-market deals.
International banks and private debt funds have provided much needed alternative pools of liquidity as some local banks have tightened deployment and are set to play an increasingly important role in Spain’s lender ecosystem in the months ahead.