Nowhere has been immune to the general decline in financing. But in Central and Eastern Europe growth oriented investors continue to target opportunities in what remain economies with long term growth prospects. CEE deal flow grew from 27 buyouts in 2005 to 39 a year later and 46 in 2007, when the market peaked, before falling back to 35 deals last year. The relative resilience is in part down to the fact that activity rose from a very low base in recent years. "There is no point pretending that its 2006 again, but there are sponsors active in the region, people like Advent, Enterprise Investors and Warburg Pincus, for whom growth can be as big a driver as leverage," said one banker.
"Most private equity is once again looking at smaller, growth oriented investments with modest if any leverage," said one investor. Enterprise Investors' acquisition of a 60% stake in Polish retailer Wema for €46m last August exemplifies the kind of deals currently finding favour, explicitly targeting growth alongside its existing private investors.
Deal makers targeting larger acquisitions have suffered from the withdrawal of the institutional investors. As well as increasing the amount of debt available, institutional investors acted as a cross border levelling agent, driving the cost of debt down to western European levels. This is now in reverse.
"The trend whereby price and leverage difference between CEE and western Europe was eroded has stopped,” said one banker. “The tightening up in all jurisdictions means that leverage is down dramatically. Today a sponsor might be able to achieve 2 1/2 x through senior and 3x in total, but not much more".
Full syndication is no longer possible but bankers insist that club deals can be done, especially where there is domestic bank support for a credit.
One damper on leverage since 2007 is the need to match the financing currency supporting transactions to the revenue currency. In 2006 and 2007 there was a trend of LBOs financed in euros but supporting companies with local currency revenues. Currency volatility over the past 18 months put an end to that trend. Financing currency now has to be matched to the revenue currency, limiting the number and type of institutions which can back individual deals.
According to a debt arranger: "For a bank to be properly engaged in the region it now needs an on the ground presence of revenues".
Club deals and bank heavy syndicates are a return to tradition for the leveraged market, rather than a paradigm shift. But it means borrowers need to be much more engaged with their lenders. "Leveraged lending is now a relationship business,” said one lender. “Banks are not interested in coming into a deal for its own sake - they want to know how it meets their relationship strategy and what ancillary business they can win on the back of the debt deal."
The big concern is defaults
International investors who committed to the region at the height of the boom are now active as portfolio managers rather than asset gatherers. So far deals have tended to be kept out of formal insolvency procedures, but how largely inexperienced investors grapple with largely untested regimes could be the big story of the coming years.
Debt managers are already being tested. The €1.15bn financing backing Permira's buyout of Hungarian chemicals company Borsodchem in 2007 is already impaired. The sponsor's listed investor SVG Capital has written its equity in the deal down to zero, and the company has asked lenders to approve a covenant waiver.
Bite Finance International, a mobile phone operator in Lithuania and Latvia, is another case in point. The company recently completed a buyback of a €110m tranche of subordinated FRNs at just 32% of face value, highlighting both the vakue destruction the downturn has wrought, and the attraction for some investors of finding an exit at almost any price