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CAPITAL MARKETS

Leveraged finance: Why the new barbarians don’t need banks

The European leveraged loan market is in overdrive, offering unprecedented terms to borrowers and pushing leverage to uncomfortable levels. Cash-rich non-banks are breaking out of the mid market and into syndication. But stoking competition for assets exposes their Achilles’ heel: the yields they have promised their own investors.

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Illustration: David Manion 

Talking about caravans can sometimes be interesting. In December last year, Canadian private equity group Onex Corporation bought Parkdean Resorts, the UK’s largest caravan park business, from Electra Private Equity and Alchemy Partners, for £1.35 billion ($1.69 billion). 

The acquisition was funded by a senior loan from five banks, totalling £600 million, and a £150 million second-lien loan provided by alternative asset manager Ares. The leverage was fairly punchy at 6.25 times the £120 million earnings before interest, tax, depreciation and amortization. Other than that the deal was pretty straightforward. 

The final deal may have been straightforward, but the composition of the alternative bidding group was anything but.

Onex faced stiff competition for the company from two other US private equity groups, Advent International and Centerbridge Partners. Onex had already tapped up Bank of America Merrill Lynch, Barclays, JPMorgan, RBC and SMBC for the senior funding.