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Leverage Creep: With EBITDA Adjustments/Synergies, Risky Loans Grow Riskier

synergies 7x loans

EBITDA adjustments, or add-backs, have been a hot topic in the global leveraged loan and high yield bond markets over the past few years as private equity shops undertaking large M&A deals increasingly rely on this technique for financing.

Of course, these adjustments – where a PE shop or acquiring entity can add an expense back to profits, significantly improving a transaction’s pro forma numbers – are not without controversy. Debt investors complain vociferously that, via add-backs, actual risk is being masked, as borrower leverage down the road will be understated if the rosy earnings numbers detailed now don’t actually come to pass.

The largest portion of these add-backs comprises synergies, or the potential financial costs savings of combining two companies.

But just how much risk do these adjustments/synergies add? If a transaction’s debt/EBITDA ratio has crept higher based on adjusted EBITDA alone, how much riskier are these deals if EBITDA adjustments are stripped out?

A significant amount, apparently, when looking at the more aggressive deals in market, and when considering synergies. For example, a relatively slim 8% of U.S. leveraged loans backing M&A had pro forma debt/EBITDA of 7x or higher this year, including synergies, up from 5% last year and on par with 2014. While this metric has risen in recent years, it remains far below the 2007 record of 17%.

Assuming, however, that expected synergies are not achieved, the share of M&A transactions levered at 7x or higher jumps to 17% this year, up from 14% in 2017 and just a few percentage points below the 2007 record of 19%. – Marina Lukatsky

This story is part of a longer piece of analysis, available to LCD News subscribers, from LCD that details add-backs/EBITDA adjustments in detail.

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US LBOs Size Grows to Post-Crisis Highs Thanks to Run of Jumbo Deals

Thanks to a spate of big-ticket deals in September, leveraged buyouts in the U.S. are larger now than at any time since the financial crisis.

During the third quarter the average size of an LBO transaction hit $1.8 billion, according to LCD. That’s up from $1.375 billion during the same period a year ago and is near the record $2 billion average in 2007, at the height of the last credit cycle.

Boosting the 3Q18 numbers are some jumbo LBOs, two of which entail large cross-border leveraged loan components. Chief here is the $17 billion majority buyout of Thomson Reuters’s Financial & Risk unit, now called Refinitiv (link, plus a list of the largest leveraged financings of all time). As well, Carlyle and GIC recently closed financing on their $11.7 billion LBO of Akzo Nobel Specialty Chemicals.

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Free Webinar from S&P: M&A Outlook, with Focus on Debt, Private Equity

S&P Global Market Intelligence is pleased to present a free webinar detailing today’s M&A market, including how current and potential obstacles might affect the leveraged finance world:

M&A Overview, with Focused Insight on the Debt and Private Equity Markets 

  • Date: Thursday, October 11, 2018
  • Time: 11:00 am – 12:00 pm Eastern time
  • Duration: 1 hour

You can register for the webinar here (link).

Included in the webinar: Transaction activity has always been impacted by numerous outside factors. Recent complications include Brexit, trade wars, and tariffs. With numerous potential influences, what is the current state of the market, based on these latest trends?

Join S&P Global Market Intelligence for a complimentary webinar, where industry experts share their insights while focusing on the M&A, Debt, and Private Equity transactional markets.

  • Analyzing recent global M&A volumes and factors driving activity. What is the outlook of M&A deals for the US?
  • Debt markets and LBO activity: What is the current state of the market?
  • Deep dive into private equity including buy and sell-side conditions and strategies

Moderator
Lawrence Choy
Associate Director – Corporates Segment
S&P Global Market Intelligence

 

Panelists
Nathan Stovall
Senior Research Analyst – FIG Research
S&P Global Market Intelligence

 

Ruth Yang
Managing Director – Leveraged Commentary & Data
S&P Global Market Intelligence

 

Justin Abelow
Managing Director – Houlihan Lokey
Financial Sponsors Group

Webinar viewers can, while registering, submit questions to be answered by the panelists.

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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LBOs Dominate Leveraged Loan Issuance in 3Q18

loan issuance by purpose

While leveraged loan issuance in the U.S. slowed in 2018’s third quarter, LBO activity surged, thanks to huge credits backing Refinitiv, Akzo Nobel, and Envision Healthcare.

These three deals comprise nearly 40% of all LBO loan activity over the past three months. The remaining $30 billion is not exactly small potatoes. In total, LBO activity in the third quarter hit $48.3 billion, a record, according to LCD. – Staff reports

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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In Test of Market, Refinitiv Wraps Massive LBO Financing; Top Deals All-time

Refinitiv last week closed a $14.25 billion leveraged loan and high yield bond package backing the LBO of Thomson Reuters’ Financial & Risk business by private equity concern Blackstone, successfully testing just how big a deal can get done in today’s red-hot global leveraged finance market.

biggest LBO dealsIndeed, despite its size—Refinitiv is the second-largest LBO financing since the financial crisis—and deal structure that some in market called aggressive, banks arranging the transaction reduced the interest rate on offer to investors during the syndications process, and commitments to the loan portion of the deal topped the $9.25 billion final amount, indicating strong investor demand for leveraged loan assets, both in the U.S. and in Europe.

The high yield bond portion of the financing ended at $4.25 billion after being reduced to compensate for an increase in the loan.

largest financings 1

As well as being the second-largest leveraged buyout since the financial crisis, Refinitiv is the ninth-largest leveraged finance deal of all time, according to LCD. Leveraged finance entails leveraged loans and bonds to speculative grade issuers.

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With Help from Refinitiv, LBO Leveraged Loan Issuance tops 2017 Levels

lbo loan issuance

Big-ticket LBOs are driving the U.S. leveraged loan market in 2018.

So far this year $90 billion of credits backing buyouts have been launched or completed in the syndicated loan market, nearly as much as in all of 2017, according to LCD.

The 2018 LBO loan figure has received a huge boost of late via a spate of jumbo transactions. Chief among them is Refinitiv, which includes $6.5 billion of institutional loan debt backing Blackstone’s $17 billion takeover of Thomson Reuter’s financial data and technology unit (the PE firm is acquiring a 55% stake). The loan portion of the deal was targeted for $5.5 billion, but was increased due to investor demand.

Tellingly, the high yield bond portion of the Refinitiv financing was decreased at the same time, illustrating the clear preference that speculative-grade debt investors have for loans this year, compared to bonds

As is often the case, LBO loans and other M&A deals are in keen demand from institutional investors as these credits generally offer higher pricing and richer returns than do non-M&A credits, because of their increased leverage and often-aggressive terms.

Of course, with the chance for higher returns comes more risk. This is especially the case today, as most credits completed in market now are covenant-lite, meaning they are less restrictive for the issuer, and consequently offer investors and lenders less protection during the life of the loan.

Indeed, of the $90 billion in LBO loans so far this year, $78 billion is cov-lite. This tracks with the overall U.S. leveraged loan asset class, which now totals some $1.1 trillion, according to the S&P/LSTA Index. Roughly 80% of those outstandings are cov-lite. – Staff reports

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Web.com Wraps $1.5B Leveraged Loan Backing LBO by Siris Capital

Web.com Group completed the covenant-lite term loan financing for its buyout via a Morgan Stanley–led arranger group, according to sources. The $1.095 billion first-lien term loan due 2025 (L+375, 0% LIBOR floor) priced at an OID of 99.75, and the $420 million second-lien term loan due 2026 (L+775, 0% floor) came at 99.25. Both priced tight to talk, and the first-lien was increased by $15 million to replace revolver draws. Financing also includes a $100 million, five-year revolver with a springing leverage covenant. Proceeds are being used to finance the take-private buyout of the company by Siris Capital in a roughly $2 billion deal. Web.com Group is a global provider of internet services and online-marketing services for small and midsize businesses. Terms:

Borrower Web.com Group
Issue $1.095 billion first-lien term loan
UoP LBO
Spread L+375
LIBOR floor 0.00%
Price 99.75
Tenor 7-year
YTM 6.25%
Four-year yield 6.31%
Call protection 101 soft call for 6 months
Corporate ratings B/B3
Facility ratings B+/B2
Recovery rating 2
Financial covenants None
Arrangers MS/RBC/Macq
Admin agent MS
Px Talk L+400-425/0%/99-99.5
Sponsor Siris Capital
Notes Upsized by $15 million.
Borrower Web.com Group
Issue $420 million second-lien term loan
UoP LBO
Spread L+775
LIBOR floor 0.00%
Price 99.25
Tenor 8-year
YTM 10.61%
Four-year yield 10.79%
Call protection 102, 101 hard calls
Corporate ratings B/B3
Facility ratings CCC+/Caa2
Recovery rating 6
Financial covenants None
Arrangers MS/RBC/Macq
Admin agent MS
Px Talk L+800-825/0%/98.5-99
Sponsor Siris Capital
Notes

 

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M&A Activity Sweeps through Global Leveraged Loan Market

With the global surge in mergers and acquisition activity so far in 2018, M&A has been a big driver of leveraged loan activity. This is especially true in Europe, where M&A accounts for nearly three-quarters of all leveraged loan issuance, according to LCD.

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Amid M&A Frenzy, LBO Leveraged Loans Surge to Record Size

europe LBO loan

Propelled by the ongoing M&A binge and mountains of cash for private equity shops to spend, leveraged loans backing LBOs in Europe have shot to record size in 2018.

These credits, which traditionally have been arranged by large banks, then syndicated to institutional investors such as collateralized loan obligations vehicles (CLOs), pension funds, and other institutional investors, have grown to an average of €689 million so far this year, according to LCD. That’s a big leap from €447 million in 2017.

Why the increase?

These mega-buyout financings are being driven by a combination of factors, including readily available and cheap debt (despite a recent widening of spreads charged to borrowers), a record amount of dry powder raised by private equity firms, strong corporate earnings, and big assets coming up for sale — especially through divestments of non-core businesses from large corporates, as well as break-ups as a result of increased shareholder activism, PE firms say.

Private equity players add that large buyouts are particularly attractive in the current market, which has become tougher due to fiercer competition, including more sovereign wealth funds and pension funds coming in, and rising valuations. Indeed, on a rolling three-month basis, average purchase-price multiples reached 11.3x in March this year, according to LCD. That’s the most since the financial crisis (though it has dipped since March).

This story is abstracted from an LCD News story by Isabell Witt.

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Amid M&A Surge, Second-Lien Leveraged Loan issuance Soars

second-lien

Second-lien activity in the U.S. leveraged loan market surged for the second straight quarter, behind the of wave of M&A transactions in 2018.

Issuance of second-lien debt increased to $12.2 billion over the past three months, the most since the second quarter of 2014, according to LCD.

As the name implies, second-lien loans are subordinate to more-senior loans – the first-lien debt – in a company’s capital structure, meaning second-lien lenders and investors will be repaid after the first-lien debt is repaid.

Consequently, these credits technically are riskier, and will have a significantly higher interest rate for the borrower. They are one indication of a hot leveraged loan market. To be sure, this described the U.S. syndications market in 2018’s first half (most of it, anyway), as investor cash continues to flow into the asset class, looking to take advantage of expected rate hikes by the Fed and relatively hefty returns.

Second-liens also go hand-in-hand with M&A activity. Indeed, M&A was behind 65% of the $10.4 billion in syndicated second-lien issuance placed during the quarter, according to LCD (the remainder of 2Q second-lien issuance was privately placed).

That said, Vertafore, a software firm backed by Bain Capital and Vista Equity, issued a $655 million tranche as part of a recapitalization that, at the time, was the second-largest second-lien ever to back a dividend. It was eclipsed by Asurion, which is held by a consortium of PE shops, with a $1.5 billion second-lien add-on launched in late June. – Staff reports

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