Caledonian collaboration

The ambitious strategies of Scottish banks to resist being sidelined in European retail banking have recently attracted much attention, but their plans also extend to high-growth areas of the capital markets.

Responding to the boom in leveraged buy-outs in Europe, Bank of Scotland (BoS) and Royal Bank of Scotland (RBS) have formed their first ever joint venture, Caledonian Capital. Already well established in the middle tier of the leveraged market (deals between $10 million and $100 million in size), the banks aim to use Caledonian Capital to position themselves as providers of loan financing in larger buy-out deals.

With the current influx of private-equity money into Europe showing no signs of slowing down and more international deals being done, the average size of LBO deals is increasing. "We felt that there was a very good living to be made in this market," says Leith Robertson, head of leveraged finance at RBS. Although both RBS and BoS are considered "major and sustainable players in middle-market senior debt, sometimes we are considered to be not up to major deals," says Robertson.

The Scottish players decided that the best strategy for making an impact on the larger market was to combine their credit analysis skills and underwriting power. "BoS and RBS have grown up with the European buy-out market, but now it has expanded beyond our balance-sheet capabilities," says David Giffin, head of leverage finance at Bank of Scotland.

Both banks feel that their high standard of experience of business risk appeals to venture capitalists looking for providers of loan finance. Although they will be competing in many cases with the major investment banks, both Robertson and Giffin point out that many bulge bracket players are fresh into the buy-out market and don't have their accumulated knowledge about private equity deals. "Through combining our resources, we are able to to leverage off the corporate relationships we have developed over the last 10 years," says Giffin.

Caledonian Capital, which employs a team of eight deal-makers, does not yet have the capacity to provide major bond financing but Robertson thinks that this need not be a disadvantage. "Some buy-out deals are not suited to bonds, and the bond market is soft at the moment anyway," he says. "Traditional lending and mezzanine financing may be more attractive."

Although several leveraged-finance deals that would have been handled by either RBS or BoS are now being channelled through Caledonian Capital, business is beginning to come to the joint venture directly, as it makes a name for itself in the markets. The leveraged finance groups of both banks will continue to exist, focusing on the execution of mid-market deals.

Caledonian Capital will focus primarily on buy-outs throughout Europe, but would consider deals from US companies if they had considerable European operations. "We try to find a debt solution for nearly all deals that a private equity provider comes to us with," says Robertson of RBS. The banks have links with most of the major private-equity groups in the UK and in continental Europe.

Since July, when Caledonian Capital was established, Robertson and Giffin have looked at over 30 deals. They have been selective about which deals to involve themselves in, participating in only 10 auctions for deal mandates.

RBS and BoS have been unofficially co-operating on deals for some months - in June they worked together as two of the co-arrangers on the financing of the £1.3 billion ($2.1 billion) buy-out of AstraZeneca speciality chemicals by Cinven and Investcorp. The banks provided £100 million of equity each.

Roberston and Giffin are both bullish about the current prospects for the private-equity market in Europe. "Private equity has momentum and it is gaining acceptance as a form of funding," says Robertson of RBS. This momentum has been accelerated since the introduction of the euro. "The common currency makes it easier to get consistency of valuation of companies across Europe," he says.Rebecca Bream