Buyout boom boosts Intermediate Capital

Record levels of liquidity in the European debt market mean the prices being paid for management buyouts are going up, according to mezzanine finance specialists Intermediate Capital.

Intermediate (ICP), which is backed by a bevy of shrewd fund managers, estimates the European buyout market topped £37 billion in the first half of the year, up 50% on 2004. Heavy competition among buyers raising new funds meant that ever-higher prices are being paid for some companies, said chairman John Manser.

In the six months to 31 July, ICP (ICP) saw profits before tax leap 94% to £78.5 million helped by strong gains on investments after taking account of provisions against impaired assets. The interim dividend rises 19% to 14p. The shares, which are held by top investors including Framlington's highly rated Roger Whiteoak, George Luckraft and Nigel Thomas, jumped 35p to £12.51.

In the first half ICP arranged or underwrote £302 million in 14 new deals, with £168 million going into its balance sheet, £94 million being taken by fund management clients and the balance syndicated to third parties.

Seven were in France, two each in Sweden and Germany and single deals in the UK, South Korea and the Netherlands. All but two financed buy-outs, one was acquisition capital and the other a high-yield bond.

Mezzanine finance is a combination of debt and equity. Although it is debt capital with repayment requirements, there are usually rights to convert to ownership or equity. It is frequently advantageous for companies as it is treated as equity on balance sheets which can make bank financing easier.

ICP’s core income rose 28% to £44 million compared to £34.5 million in the first half of last year. This came from growth in net interest income following an increase in the loan book and the impact of new accounting standards.

Refinancing and repayments were at record levels with 13 companies in the portfolio repaying £141 million. Additionally, existing borrowers with £208 million of lending refinanced their debt. ICP increased its overall exposure to these companies by £8 million. Total loans of £349 million were repaid or refinanced, 28% of the opening loan book.

Manser said although there has been a good flow of mezzanine opportunities in Europe the company has been selective, rejecting a number of potential deals because the returns were inadequate when measured against the perceived risk.

The second half had started well in conditions similar to those of the first half. The high levels of repayment have continued and profits for the year should again benefit from a good level of gains on investments.

Bridgewell described the figures as strong and the pipeline ‘encouraging’. ICP's prediction of a good level of capital gains for the remainder of the year, bodes well for upgrades to consensus estimates, it said.

Numis rated the shares a ‘buy’ and described the figures as ‘fantastic’ with the core income 7% ahead of its forecast. It upgraded its forecast for core income to the end of January 2006 by 11% and 13% for 2007. Although the group is changing its year end and will report a 14-month period, Numis is estimating profit before tax of £90 million for the 12 months to March 2006 and £99.5 million for the following year.

Citywire Verdict:
This is a specialist market and the best investment decisions need specialist knowledge. The shares, £11.95 in January, suffered until May’s 12-month low of 971p and have since climbed steadily. There is room for them to go higher and the opportunities for this kind of finance will grow until the big banks take a more relaxed view of debt.