Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market

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1 December 204 Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market For future copies of this publication, please sign-up via our link at Alternative Lender Deal Tracker

2 Deloitte Alternative Lender Deal Tracker Welcome to the third issue of the Deloitte Alternative Lender Deal Tracker (the Netherlands edition) that now covers 35 leading alternative lenders with whom Deloitte is tracking primary mid-market deals across Europe with up to 350m of debt. The number of deals covered has increased to over 30 transactions over the past 24 months. Mid market alternative lending across Europe has continued to grow in 204 with an impressive 9% year on year increase in Q3 deal flow compared to Q This quarter has set a new record of 73 deals. The outlook for 205 remains very strong with Deloitte estimating European direct lending funds looking to raise in excess of 5bn in the next 2 months for private debt strategy. As with previous editions we have included an alternative lender guide. We have also included the key outputs of the Deloitte Q3 204 CFO survey. In this issue Deloitte Alternative Lender Deal Tracker 2 Key Trends in the alternative lending market 3 Alternative lenders increasingly targeting deals in Western Europe 4 Alternative lenders continue to increase their deal flow 5 Results from Deloitte s CFO survey, Q Alternative lender guide 7 Deloitte Debt Advisory Team 8 Debt Advisory Credentials Season's Greetings on behalf of Deloitte s Debt Advisory team Alexander Olgers - Head Debt Advisory Tel: +3 (0) aolgers@deloitte.nl Karel Knoll Senior Manager Debt Advisory Tel: +3 (0) kknoll@deloitte.nl Willem Reddingius Manager Debt Advisory Tel: +3 (0) wreddingius@deloitte.nl Thomas Schouten Senior Consultant Debt Advisory Tel: +3 (0) tschouten@deloitte.nl Fenton Burgin - Co Head Debt Advisory Tel: +44 (0) fburgin@deloitte.co.uk Floris Hovingh Director Head of Alternative Lender Coverage Tel: +44 (0) fhovingh@deloitte.co.uk Nedim Music Assistant Director Alternative Lender Coverage Tel: +44 (0) nemusic@deloitte.co.uk Important Notice Disclaimer Deloitte ( Deloitte ) treats survey responses with professional care. Responses provided by the participants of the survey are included within the Deloitte Alternative Lender tracker and distributed free of charge to survey participants only. Please ensure, in providing this information, that you do not breach any existing confidentiality arrangements you may have entered into. Please note that Deloitte may also use the survey data for other purposes. Accordingly, information derived from the responses to this Survey may be shared by us with other companies. We are not responsible for the subsequent use made of such information by such companies or for any further disclosure they might make. Deloitte has no liability for any information supplied to Deloitte in breach of any existing confidentiality agreement. This Deal Tracker ('the Deal Tracker') has been prepared by Deloitte with input from participants to the Deal Tracker. As such it is the property of Deloitte. Recipients of the Deal Tracker should not assume that the Deal Tracker is appropriate for their purposes. In the absence of formal contractual agreement to the contrary, Deloitte expressly disclaim any responsibility to you, or any other party who gains access to the Deal Tracker. Any form of disclosure, distribution, copying, reference to, or use of this Deal Tracker or the information in it or in any attachments is strictly prohibited and may be unlawful. If you have received this Deal Tracker in error, please notify Deloitte, delete the Deal Tracker and destroy any copies of it. For the avoidance of doubt, in the absence of formal contractual agreement to the contrary, neither Deloitte nor their partners, principals, members, owners, directors, staff and agents and in all cases any predecessor, successor or assignees shall be liable for losses, damages, costs or expenses arising from or in any way connected with your use of the Deal Tracker. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ("DTTL"), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. Deloitte is the United Kingdom member firm of DTTL. 204 Deloitte Touche Tohmatsu Limited. All rights reserved. Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market 2

3 Key trends in the alternative lending market Key Trends General This year has seen a number of high profile alternative lenders raising additional capital. Deloitte estimates that European direct lending funds currently have in excess of 45bn of committed capital dedicated to private debt and who are looking to raise in excess of 5bn in the next 2 months. The European alternative lender market s growth has accelerated in 204. The Deal Tracker records a 9% year on year increase in Q3 deal flow compared to 203. We have recorded 30 transactions completed by 35 alternative lenders in our survey since October 202, with 8 countries now reporting transactions. In Q3 63% transactions were outside UK compared to 29% in Q M&A continues to be the strongest driver of alternative lender transactions. Whilst there is still positive sentiment, European markets have cooled down in Q3, directly impacted by the volatility witnessed in the HYB and equity markets in October this year. A number of transactions in the European markets are reported to have witnessed push back from investors which resulted in market flexes on structure and pricing. Supply side dynamics against a backdrop of low M&A volumes have resulted in some European borrowers securing lower pricing than comparable US companies. Alternative lender outlook Based on our analysis, we predict a number of key European market developments for 205, specifically: The number of alternative lender transactions will continue to increase, More debt funds will be able to attract leverage at fund level which will enable them to provide lower pricing The hold size of loans by funds will continue to increase Increased TLB and cov loose issuance in the mid-market More funds targeting the smaller end of the mid-market Increased alternative lender deal origination in the European market Stronger collaboration between banks and alternative lenders A number of larger funds being able to provide an underwritten option In response to this Alternative Lender liquidity directed towards private companies, European banks are increasingly offering greater flexibility including non amortising TLB structures as they respond to market pressures from alternative lenders. Key Trends Dutch market We observe a certain hesitation from the Dutch PE players towards alternative lending and relatively low volumes, driven by unfamiliarity with the product and relative competitive pricing for bank financing in the mid-market Number of deals completed 9% increase in deal flow Q3 4 compared to Q3 3 However given the actual and expected high activity in M&A, for 205 we expect that an increasing number of Dutch transactions will be supported by alternative lenders Next to Private Equity, it is expected that Privately owned mid-market businesses will find alternative lender funding solutions Q4/2 Q/3 Q2/3 Q3/3 Q4/3 Q/4 Q2/4 Q3/4 UK Euro Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market 3

4 Alternative lenders increasingly targeting deals in Western Europe UK, France and Germany cover 82% of the deal flow. 45% of the transactions were in the UK, 25% in France and 2% in Germany. Deal volume main geographies Out of the 35 lenders surveyed only lender has not completed a deal yet. Unitranche product (47% of deals) is more popular in UK, while on the continent the senior product (4%) is dominant. 3 4 In the UK 39% of transactions were related to LBO financing, almost in line with number of deals in Europe (43%) % of deals in UK relate to dividend recaps compared to only 7% in Europe Structures (UK & Europe) Deal purpose (UK & Europe) 6 60% 70% 50% 60% 40% 30% 20% % 50% 40% 30% 20% % 2% 8% 45% 0% Q4/2 Q/3 Q2/3 Q3/3 Q4/3 Q/4 Q2/4 Q3/4 0% Q4/2 Q/3 Q2/3 Q3/3 Q4/3 Q/4 Q2/4 Q3/4 25% Senior Unitranche Other* M&A Other* * Other includes 2 nd lien, Mezzanine and PIK / other. * Other includes dividend recapitalisation and growth capital. UK France Germany Rest of Europe Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market 4

5 # #2 #3 #4 #5 #6 #7 #8 #9 # # #2 #3 #4 #5 #6 #7 #8 #9 #20 #2 #22 #23 #24 #25 #26 #27 #28 #29 #30 #3 #32 #33 #34 #35 Alternative lenders continue to increase their deal flow Alternative Lender Deal Tracker Covers 35 leading alternative lenders, who have participated in 35 UK and 66 European mid market deals in the last 8 quarters. Only primary mid market UK and European deals with debt up to 300m or 350m are included in the survey. Q3 204 had the highest deal flow with 73 deals. Number of deals completed Q4/2 Q/3 Q2/3 Q3/3 Q4/3 Q/4 Q2/4 Q3/4 UK France Germany Other % increase in deal flow Q3 4 compared to Q3 3 Survey participants The most active alternative lender participated in 42 transactions. The top 3 lenders by deal flow have participated in 30% of the transactions included in our survey. Only 24% of transactions involved multiple alternative lenders. 20% of the participating funds have completed 2 or less transactions since the survey began. Number of completed per lender 30% of the deals UK Euro Uneven distribution with top 3 funds participating in 30% of the transactions. providing bespoke structures for mainly event financing situations Deal purpose The majority of the deals are LBO related, with UK accounted for 39% and EU 43% of Euro deals being used to fund a buy out. 24% of UK and 28% of Euro deals surveyed related to refinancing, while only 5% of UK and 7% of Euro related to a divided recap. Of the 30 deals, 66 deals did not involve a private equity sponsor. Deal purpose overview 50,0% 40,0% 30,0% 20,0%,0% 0,0% UK 43,4% 39,3% Euro LBO 4,8% 7,2% Dividend recap 24,4% 28,3% 8,4% 6,7% Bolt-on M&A 4,8% 2,7% Growth capital 49% of the transactions involve M&A. Structures Unitranche is the dominant structure, with (47% of UK and 37% of Euro) of the transactions classified as a Unitranche structure. Alternative lenders are mainly competing with banks, as 79% of the transactions are structured as a first lien structure (Senior / Unitranche). Subordinated structures represent only 2% of the transactions. Deal structure overview 50,0% 47,2% 40,8% 40,0% 36,8% 32,6% 30,0% 20,0% 6,% 2,5%,0% 4,9% 5,7% 2,8% 0,6% 0,0% Senior Unitranche Second lien Mezz PIK/other 79% first lien 79% of the transactions are structured as first lien Senior or Unitranche. The mezzanine product is more popular outside UK. UK Euro Second lien volume remained low. * For the purpose of the deal tracker, we classify senior only deals with pricing L + 650bps or above as Unitranche. Pricing below this hurdle is classified as senior debt Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market 5

6 Results from Deloitte s CFO survey, Q3 204 Great optimism Easy credit The downward trend of business confidence continued in the third quarter of 204 and came in at 3 percent. In the UK, confidence deteriorated at a slower pace and stood at 5 percent. Chart. Business confidence Credit is still perceived as both available and cheap. Financing conditions are easy these days a big contrast to the same quarter two years ago. Chart 4. Cost and availability of credit North American CFOs business confidence increased again to 32 percent. Net % of CFOs who are more optimistic about the financial prospects for their company now than three months ago Net % of CFOs reporting that funding for corporates is cheap or expensive, and funding is easily available or hard to get The perception of economic uncertainty rose for the first time since the second quarter of 203, mainly due to the decelerated recovery of the Eurozone economy and geopolitical tensions. Only 22 percent of the panelists rate the level of uncertainty facing their business as normal or lower than normal versus 44 percent last quarter. Chart 2. Uncertainty Although less attractive than in the previous quarter, corporate debt is still perceived as the most favored source of funding, followed by bank borrowing. Equity is seen as least attractive. Chart 5. Favoured source of corporate funding % of CFOs who rate the external financial and economic uncertainty facing their business as normal, or below normal Net % of CFOs reporting the following sources of funding as (un)attractive The percentage of CFOs who expect their cash flow to increase, decreased from 8 percent last quarter to 7 percent now. The number of CFOs expecting a decline in cash flow now stands at percent (from 3 percent), while 9 percent (up from 7 percent) expect cash flow to remain unchanged. Chart 3. Change in cash flows over the next 2 months The percentage of CFOs who believe that now is a good time to be taking greater balancesheet-related risks increased for the sixth consecutive quarter and now stands at 45 percent. This compares to risk appetite of CFOs in the UK, where risk appetite reached a seven-year high at 72 percent. Chart 6. Risk appetite % of CFOs who expect their companies operating or free cash flows to increase/decrease over the next 2 months % of CFOs reporting that now is a good time to be taking greater balance sheet-related risks Note: The 204 Q3 survey took place between 23 September 204 and October 204. A total of 3 corporate CFOs completed our survey, representing a net turnover per company of approximately EUR.9 billion. The responding companies can be categorized as follows: less than 0 million (9%), million (3%), million (32%), -4.9 billion (23%), more than 5 billion (9%), and unknown (3%). Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market 6

7 EV multiple of EBITDA Alternative lender guide UPDATE Who are the alternative lenders and why are they becoming more relevant? Alternative lenders consist of a wide range of non-bank institutions with different strategies including private debt, mezzanine, opportunity and distressed debt. These institutions range from larger asset managers diversifying into alternative debt to smaller funds newly set up by ex-investment professionals. Most of the funds have structures comparable to those seen in the private equity industry with a 3-5 year investment period and a year life with extensions options. The limited partners in the debt funds are typically insurance, pension, private wealth, banks or sovereign wealth funds. Over the last two years a significant number of new funds have been raised in Europe. Increased supply of alternative lender capital has helped to increase the flexibility and optionality for borrowers. Key differences to bank lenders? Access to non amortising, bullet structures. Ability to provide more structural flexibility (covenants, headroom, cash sweep, dividends, portability, etc.). Access to debt across the capital structure via senior, second lien, unitranche, mezzanine and quasi equity. What type of alternative lenders are active in the European mid market? Type of fund Type of loans Typical yield requirement Unitranche structure compared to traditional LBO structures Number of funds targeting the European mid market Leveraged private debt funds Senior / Unitranche loans Below L + 7.0% < Unlevered private debt funds Senior / Unitranche loans Above L + 7.0% > 40 Mezzanine funds Subordinated loans Coupon of % -5% > 30 Quasi equity funds Senior and subordinated loans Target IRR of 5% -20% > 30 Special situations / distressed funds Senior and subordinated loans Target IRR of % -20% > 30 Hedge funds Senior and subordinated loans Varies with risk profile > 40 x Senior Debt Unitranche Mezzanine Equity Increased speed of execution, short credit processes and access to decision makers. 8x Potentially larger hold sizes for leveraged loans ( 30m up to 200m). Deal teams of funds will continue to monitor the asset over the life of the loan. However, Funds are not able to provide clearing facilities and ancillaries. Funds will target a higher yield for the increased flexibility provided. Untested behaviour of funds throughout the cycle. 6x 4x 2x 0x Subordinated First lien First lien First lien Senior Unitranche Senior & Mezzanine Three key questions to ask when dealing with alternative lenders:. What type of fund am I dealing with and what strategy do they employ? 2. What is the track record, sustainability of the platform, and reputation of the fund and the individuals working within the fund? 3. What is the current stage of the fund s lifecycle? Key differences of Unitranche compared to traditional LBO structures Unitranche debt is senior plus mezzanine debt combined into one tranche with a blended pricing. Banks typically require the senior debt to carry 30 40% amortisation whereas Unitranche has a bullet maturity. Unitranche increases the total debt capacity to c x EBITDA without having the complexity of a subordinated mezzanine tranche. Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market 7

8 Deloitte Debt Advisory Team UK & NL Senior team USA Alternative lender coverage Fenton Burgin +44 (0) Alexander Olgers ++3 (0) James Douglas +44 (0) Chris Skinner +44 (0) John Gregson +44 (0) Nigel Birkett +44 (0) nbirkett@deloitte.co.uk John Deering Managing Director jdeering@deloitte.com Floris Hovingh Head of Alternative Debt +44 (0) fhovingh@deloitte.co.uk Nedim Music Assistant Director +44 (0) nemusic@deloitte.co.uk Henry Pearson Manager +44 (0) hepearson@deloitte.co.uk Deloitte Debt Advisory NL is your national and principal partner and empowers global access to funding recourses Deloitte Debt Advisory UK is our and your partner with highest expertise, joint execution power and access to UK markets Deloitte Debt Advisory - entrance to global liquidity and local execution resources Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market 8

9 Deloitte Debt Advisory Team Independent Debt Advisor with an unrivalled global reach Typical Debt Advisory moments Completely independent Because we are completely independent from financiers, our objectives are always fully transparent and alignedwith those of our clients Acquisitions, disposals & mergers Acquisition financing Merger financing Stapled financing Extensive network of contacts within (inter)national financiers Our team of high profile senior ex-bankers and career debt advisors provides in-depth knowledge and understanding of the debt markets, underpinned by an extensive network of contacts within (inter)national financiers Growth- and refinancing Maturing debt facilities Syndicated borrowings Asset based financing Off balance sheet financing Integrated solutions We provide advice to borrowers across the full spectrum of debt markets and instruments; a.o. strategic analysis of optimum capital structures and available sources of finance We work fully integrated with our M&A, tax, audit and consulting teams, realising tailor-made, comprehensive and integrated debt solutions Restructurings and renegotiations Covenant waiver and reset negotiations Trading downturns Credit rating downgrades Facility extensions and amendments New money requests and debt buy backs Alternative Lending Unrivalled global reach One of the leading teams in the Netherlands with a global network of Debt Advisory professionals spanning 32 countries, giving us unrivalled global reach Integral part of Deloitte Corporate Finance Independent advice and world class execution resource across the full spectrum of debt markets and instruments Market Leader Deloitte Debt Advisory is the market leader for mid market alternative lender transactions, having completed over 25 alternative lender transactions in UK since 202 We provided unparalleled access to global liquidity through our dedicated global Alternative Lender coverage teams in key financial centres Our clients Our clients include public and private companies, private equity firms and their investee companies and financial institutions Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market 9

10 Selection of UK Debt Advisory Deals NL Debt Advisory deals Recent Debt Advisory Credentials 204 Energyst Advisory Boels Financing Vreugdenhil Humares Triacta/Vingino Acquisition finance Attema WestCord Hotels Keepmoat Staple financing Premier Farnell Plc HgCapital Acquisition financing HgCapital HgCapital Acquisition financing Equistone Acquisition financing Lavendon Group Plc Rutland s Dividend recap Tarsus Group plc Amend & Extend Mitie plc HgCapital Chiltern Acquisition financing WH Smith Plc Equistone Acquisition financing DMGT Plc Baxters Food Group Inflexion Bridgepoint Shanks Group & retail bond Cape Plc HgCapital Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market

11 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. 204 Deloitte. All rights reserved. Designed and produced by The Creative Studio at Deloitte, London. 3378A Deloitte Alternative Lender Deal Tracker Focussed on primary deal flow in the European mid market