PE-backed European consumer companies close to breaching debt covenants – Lincoln International


Private equity-backed consumer business in Europe are close to breaching their lenders’ covenants according to analysis from investment bank Lincoln International.

Consumer companies’ average EBITDA leverage levels from January to March were at 6.7x, with just 4% headroom available before breaching lenders’ covenants, Lincoln said, citing its database of more than 260 mid-cap UK and EU based PE owned companies.

EBITDA leverage multiples in the consumer sector were far higher than the average multiple of 5.5x recorded across sectors, including business services, healthcare, industrials and technology.

Richard Olson, Managing Director of Lincoln International’s London valuations and opinions group, said, “Private credit headroom for many consumer companies is extremely tight because they have struggled to generate revenue and cash flow throughout the pandemic.

“Across sectors, lenders have shown considerable flexibility in amending covenants during the crisis to support companies, and lenders may continue to do that as lockdowns ease and normality returns.

“But many consumer businesses are getting very close to having difficult conversations with their lenders.”

Lincoln said consumer enterprise values as a multiple of EBITDA declined to 9.8x from 11.6x in the first quarter of 2021, reflecting continued uncertainty in the sector.

Technology also saw a drop, from 13.4x to 11.8x, which is more in-line with the industry’s longer-term multiples. Multiples across all other sectors increased quarter-on-quarter.

Outside the consumer space the outlook for private equity backed companies is strong, the data suggests.

Lincoln’s survey of private equity funds at the end of March showed that 73% of respondents expected enterprise value multiples, which have largely recovered to their pre-pandemic positions, to either increase or remain at current levels by the end of 2021.

They expect growth to be driven primarily by add-on acquisitions (46% of respondents) and organic expansion (38%).

Dividend recapitalizations are also set to soar, with 63% of respondents considering them.

Olson said, “We remain watchful of recovery trends in the consumer industry, as this will highlight the overall health of European economies.

“We are also watching inflation indicators closely, although so far markets’ reactions have been muted.”

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