Real Deals | Consumer Business on Verge of Breaching Covenants

Sep 2021

Originally published by Real Deals on September 27, 2021, by Simon Thompson.

Private consumer businesses in the UK and Europe are close to breaching their lenders’ covenants. That is according to a report by investment bank Lincoln International.

The development comes despite better and recovered performance in consumer based companies in the UK and Europe.

Richard Olson, managing director of Lincoln International’s London Valuations & Opinions Group, said, “Whilst there has been improvement in the performance of some consumer companies in the UK and Europe, trading conditions are still tough for the sector as we emerge from the pandemic. The gap before hitting their covenants remains tight for many consumer businesses.

“The real test will come with the third quarter numbers, which will reflect summer trading patterns. The industrial sector also still has a slim buffer, but it is not on quite the same shaky ground as consumer.”

Consumer leverage covenant headroom available has edged up to 8 per cent from Q1 2021’s 4per cent, but remains considerably below the prior year of 18 per cent (Q2 2020), and is much lower than other sectors.

At 6.5x, consumer Ebitda leverage in Q2 2021 is also substantially higher than the average across other sectors (5.4x), although it slightly declined from the previous quarter’s 6.7x.

Robust enterprise values

However, enterprise values as a multiple of Ebitda in consumer increased to 12.2x in the quarter from 9.8x in Q1 2021.

According to Lincoln, investors have shown a willingness to look toward more normalised trading through YE 2021 and into 2022, thus the higher multiples paid and leverage advanced ontoday’s Covid-impacted Ebitda.

Multiples were also up in all other sectors, equating to an average 12.2x versus 11.9x in Q1 2021,which is higher than pre-pandemic levels.

”Valuations of private equity-backed companies are continuing their upward trajectory across the UK and Europe to historical highs,” added Olson. “With the wall of dry powder and the scarcity of quality targets, asset prices and multiples are set to continue at peak levels into 2022.”

The report is based on a database of UK- and EU-based private equity-owned companies.