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Private Equity Shops Bulk Up on Leveraged Loan Add-On Deals

add-on deals

Private equity–backed companies looking to grow through acquisitions have been an active lot in the U.S. leveraged loan market this year.

Institutional loan issuance backing sponsored add-ons that fund M&A has surged to an all-time high for the first five months of 2018 (this data includes all deals launched through June 5).

At $38.6 billion, this add-on volume is 44% higher than the comparable YTD total in 2017, which itself represented the previous peak during this observation period. Despite the year-over year rise, it’s worth noting that the full-year 2017 total was a record $64.4 billion of sponsored add-on issuance, 58% of which was booked between June and December.

In addition to high LBO supply, escalating purchase price multiples are another reason for rising add-on M&A. PE firms are increasingly focused on growing existing portfolio companies via synergistic tuck-in acquisitions that can help reduce the average cost of a transaction over time. – Jon Hemingway

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Leveraged Loan Issuance Gains Steam in Europe, thanks to LBOs

europe leveraged loan issuance

Strong demand from collateral loan obligations helped European loans work through a generally volatile May to post strong new-issue volumes.

M&A was the clear driver for European loans in May, providing €8.5 billion (when including LBO and other related deals) out of a total new-issue volume of €10.5 billion, according to LCD. This meant M&A was responsible for roughly 81% of deals last month, following a not-too-dissimilar share in April (when acquisition-linked loans brought a nearly 90% of supply).

This M&A-led market is certainly what investors had been asking for at the start of the year, having been through several refinancing spikes over the previous 18 months or so. These deals had helped keep reported volumes high, but did not always help those players looking to add assets or maintain returns.

Year to date, leveraged loan issuance  in Europe targeted for institutional investors totals €41 billion, on par with activity at this point last year. – David Cox

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M&A Takes Charge in Europe’s Leveraged Loan Market

european loan volume

M&A activity is driving issuance in the European leveraged loan segment so far in 2018.

So far this year there have been €8 billion in loans backing leveraged buyouts launched to the syndications market, along with €9 billion supporting other M&A. That total, €17 billion, makes up the lion’s share of the €27.4 billion in overall issuance, according to LCD.

And although the market has clearly seen the return of big deals, such as those for ProSieben (€7.3 billion), Wind Telecomunicazioni (€7.2 billion), and TDC A/S (€7.2 billion), M&A-related volume is not only comprised of the headline transactions.

Indeed, this year has seen a steady stream of smaller-scale buyout and acquisitions, along with secondary buyouts. These include the buyouts of Flamingo with a term loan of €280 million, the €195 million TLB backing Cinven’s buyout of Planasa, and Equistone Partners’ sale of E. Winkemann to Cathay Capital Private Equity.

Buy and build has also been a feature of the market, with Nordic Capital’s acquisition of three dental chains in the Netherlands, Switzerland, and Germany, and the €375 million total financing backing Ardian’s buyouts of Spanish bread and bakery companies Berlys and Bellsola. – Taron Wade

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With Spotlight on Guidelines Fading, Leverage on US Loans Creeps Higher

6x LBOs

Leverage in the U.S. loan market continues to creep higher.

The share of LBO loans with debt/EBITDA of at least six times – a level specified by Federal agencies in 2013 as meriting “special concern” – has just reached its highest point since the financial crisis, according to LCD.

The surge in these deals comes amid sustained institutional investor demand for higher-yielding assets. Consequently, lenders and investors have been accommodating to leveraged loan issuers of all stripes over the past few years, doling out covenant-lite credits and rapid repricings in record fashion.

Leveraged lending guidelines for U.S. banks, laid out by Federal agencies in 2013, have returned to the headlines of late,  most recently when Comptroller of the Currently Joseph Otting said that banks “have the right to do what [they] want” regarding leveraged lending (as long as those actions don’t impact “safety and soundness,” that is).

Those guidelines stated that  loans with debt to EBITDA of six times or more would merit special concern, prompting banks under the watchful eye of the Fed to pull in the reins on highly leveraged deals.

To a degree, anyway. Turns out, leverage on loans backing U.S. LBOs have been creeping higher over the past several years, to the point where roughly  53% of LBOs for large corporate borrowers had pro forma leverage of 6x or higher so far this year, a post-crisis high (2014 came close, at 52%). For reference, 2007 continues to hold the record, when 61% of buyouts fell into this category. – Tim Cross

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Secondary Buyouts Dominate LBO Activity in Leveraged Loan Mart

Rallying stock markets and sky-high business valuations led cash-rich private equity firms to turn to other sponsors for acquisition targets in 2017. As a result, secondary buyouts (SBOs), as a share of all LBO financing transactions in the U.S. leveraged loan market, hit a record high of 65% in 2017, according to LCD.

That’s up from 56% in 2016 and tops the previous record of 62% in 2014 (these numbers are based on transaction count).

The SBO activity easily surpassed the 2017 share of old-school take-private acquisitions (14%) and corporate carve-outs (9%), illustrating just how firmly the sponsor-to-sponsor activity has taken root in today’s market.

“Not only are we actively buying from private equity, but we’re actively selling to private equity, and in almost equal amounts,” explains the head of a large buyout firm. “It’s been an active strategy of ours since the beginning, but the opportunity is different now than it was then, when there were thousands of companies that the IPO market had shut out.”

All-in, PE sponsors raised $55.8 billion in the leveraged loan market to fund secondary buyouts in 2017, including $49.2 billion of institutional issuance. That’s the most ever, and is 10% higher than the prior record, $50.6 billion in 2014.

Investors have been eager to allocate capital into the private equity space, an appealing asset class in what has been a stubbornly low-yield investment environment. That appetite for juicier returns drove fundraising to new heights last year, with dry powder at U.S. PE firms rising to $565.9 billion in 2017, according to Pitchbook. Of course, those shops are inclined to put that money to work.

The challenge has been finding good-quality targets in an expensive market. Given the mounting demand, purchase price multiples for LBOs hit an all-time high of 10.6x in 2017, according to LCD, marking the third straight year above 10x. Secondary or tertiary buyout multiples rose to 11.1x at the same time, likewise a record. — Jon Hemingway/Mairin Burns

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M&A Leveraged Loan Activity Holds Steady, While Share of LBO Deals Rises

Though the volume of M&A-related institutional leveraged loan deals remained steady in 2017’s third quarter, private equity/sponsor-driven activity increased, both in absolute terms and by share of market, according to LCD.

Institutional M&A volume (including LBOs) was on par with 2Q17, at $65.6 billion, but perspective is helpful here: Prior to 2017 one would have to look all the way back to 1Q07 to find a higher volume figure. Sponsored deal volume gained for the fourth consecutive quarter, with LBOs leading the way, logging their seventh straight quarterly increase, to $36.9 billion, the highest figure since 4Q07.

At $56.5 billion in the third quarter of this year (including pro rata), private equity-backed acquisition financing is the most prominent it’s been since 2Q07, representing 70% of total M&A. And those deals are getting more expensive. Private equity firms, of course, sit atop an ever-growing mountain of dry powder—that figure could reach $1 trillion by year-end, according to Preqin—and they’re eager to put that cash to work. This has contributed to an uptick in purchase price multiples in 2017, to 10.35x for the year through Sept. 19, from 9.99x last year.—Staff reports

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Leverage on US LBOs Hits Highest Level Since Financial Crisis

lbo leverage

Leverage on large U.S. LBOs crept to 6:1 in 2017’s third quarter, the highest it’s been since the financial market meltdown of 2007, according to LCD.

That 6x number is of particular interest to the global leveraged finance market.

Federal regulators, in an effort to shore up the financial markets after the crisis, in 2013 issued guidance saying that loans with a debt/EBITA ratio in excess of 6x “raises concerns.” This prompted traditional corporate lenders – banks regulated by the Fed – to proceed cautiously regarding highly leveraged transactions. This cautiousness, in turn, has helped open up the direct lending/private credit market, where non-regulated asset managers increasingly are stepping in to provide often-riskier credits to leveraged borrowers.

A few items of note here: While non-regulated lenders continue to make inroads into the leveraged lending space, most of the deals underlying the above chart were led by traditional banks, demonstrating that those entities continue to drive this market.

Also, while overall leverage has indeed crept higher of late, other credit metrics point to a less ‘risky’ market in 2017 than in 2007, so 6.x leverage does not necessarily mean that risk is approaching unmanageable levels. (As well, a number of loan market participants continue to call the 6x target by the Fed ‘arbitrary’.)

LBOs, of course, are especially attractive to loan arrangers and investors as they generally feature higher fees and interest rates than non-M&A credits, such as those backing refinancings or general corporate purposes. The higher-yielding M&A deals comprised a relatively large share of leveraged loan activity in 2017’s third quarter, according to LCD. This is a marked change from the first half of the year, when repricing activity and other ‘opportunistic issuance’ dominated the U.S. loan space.

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Staples Wraps $1B High Yield Bond Offering Backing Sycamore LBO

Staples has completed a $1 billion offering of eight-year notes at the wide end of talk, sources said. Bank of America Merrill Lynch was lead on a bookrunner group that included 10 additional banks. Proceeds will be used to back the issuer’s $6.9 billion buyout by Sycamore Partners. The transaction was downsized from $1.3 billion. A concurrent first-lien term loan also backing the LBO transaction was increased by $200 million, to $2.9 billion. There has also been a $100 million decrease in funded debt, sources said. Prior to launching, the borrower had planned for $1.6 billion of the bonds, but steered $300 million to the TLB to meet investor demand. A $1.2 billion ABL facility will also be put in place to back the LBO. The buyout is expected to close in 2017. Terms:

Issuer Staples (Arch Merger Sub Inc)
Ratings B–/B3
Amount $1 billion
Issue Senior (144A/Reg S-for-life)
Coupon 8.5%
Price 100
Yield 8.5%
Spread T+637
Maturity Sept. 15, 2025
Call non-call three (first call at par + 50% of coupon)
Trade Aug. 14, 2017
Settle Aug. 28, 2017 (T+10)
Joint bookrunners BAML/UBS/DB/CS/RBC/JEFF/FifthThird/GS/C/KKR/ Natixis
Price talk 8.25% area
Notes Downsized from $1.3 billion; up to 40% equity claw @ 108.5 until Sept. 15, 2020; change-of-control put @ 101; make-whole @ T+50

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Staples Readies $4B Leveraged Finance Package Backing LBO by Sycamore

staplesStaples is on the cusp of kicking off roadshows for $1.3 billion of eight-year (non-call three) notes backing the buyout of the company by Sycamore Partners. An investor call and lunch is scheduled for tomorrow, Aug. 10 at 12:30 p.m. EDT. Pricing is expected next Monday.

Joint bookrunners on the deal are Bank of America Merrill Lynch, UBS, Deutsche Bank, Credit Suisse, RBC Capital Markets, Jefferies, Fifth Third, Goldman Sachs, Citi, KKR Capital Markets, and Natixis. The debt is being shopped with a first call at par plus 50% coupon and an up to 40% equity claw for the first three years. Issuance will come under Rule 144/Reg S-for-life.

S&P Global Ratings on Aug. 8 downgraded for the borrower’s corporate rating to B+, from BBB–. It has assigned a B–, with a 6 recovery rating, to the notes.

Similarly, that same day Moody’s lowered its unsecured rating for Staples to B3, from Baa2, and assigned a B1 corporate rating to the company.

The move from both agencies was triggered by Sycamore’s leveraged buyout of the company.

Meanwhile, the borrower today upsized a first-lien term loan by $300 million, to $2.7 billion. The same amount was removed from the notes offering, which was originally expected to be a $1.6 billion issue. A $1.2 billion ABL facility will also be put in place.

At closing of the acquisition, there will be an internal reorganization whereby the U.S. retail, Canadian retail, and the North American delivery businesses of Staples will be separated into standalone entities. The $5.2 billion debt package is for the financing of the North American delivery segment, which will leverage the business on a pro forma basis at approximately 4x, sources note. The transaction is expected to close in 2017.

Staples (Nasdaq: SPLS) in June disclosed that Sycamore would acquire the company in a $6.9 billion transaction. Under the terms of the agreement, Staples’ stockholders will receive $10.25 per share. — Staff reports

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Leveraged Loan Investors Get Help from Private Equity Shops via LBOs

Leveraged loan investors pining for M&A activity amid the steady diet of opportunistic issuance during 2017’s first half have been getting at least some help from sponsors.

Private equity shops, which sit atop an ever-growing mountain of cash, have undertaken secondary buyouts at an impressive clip in 2017, racking up $31.1 billion in institutional loans supporting these transactions, according to LCD. This is the second-highest reading for any comparable time period on record (through July 20), behind $32.9 billion in 2014.

The total for 2017 already is the fourth-highest for a full year on record, behind the prior three years, which ranged from $33.2 billion (2015) to $45.3 billion (2014). If the current pace continues, the 2017 total will be upwards of $60 billion.

While LBO activity of any stripe is a welcome sight to today’s yield-parched investors, 2017 buyouts have been relatively limited to secondary transactions, in which one PE shop purchases an asset from another PE shop. Loans backing sponsor-to-sponsor deals account for 64% of overall LBO activity in 2017, the most since LCD began tracking this data in 2007 (based on transaction count).

 

Indeed, with stock prices remaining in the stratosphere, there have been precious few traditional public-to-private LBOs this year. Only 13% of 2017 leveraged buyouts have backed public-to-private transactions, with loans totaling $15.1 billion, according to LCD. It’s worth noting, however, that there is decent public-to-private loan volume en route, including such deals as Staples ($2.4 billion), West Corp. ($2.7 billion), and Parexel ($2.065 billion).— Staff reports

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