Smaller companies are loading up on debt like never before. In fact, lenders this year have let multiples fly despite often citing lower leverage among the benefits of trading in liquidity for investing downmarket.
S&P Capital IQ LCD’s third-quarter data illustrates the trend. Year-to-date, total leverage has climbed to an average of 4.9x, a lofty level in itself, but more stunning for another reason: it’s the first time the middle market has eclipsed the large corporate market, which averages 4.7x for the same period.
To be clear here, LCD’s middle-market data is skewed toward sponsored deals that are syndicated. LCD’s pool is composed largely of borrowers that generate $25-50 million of EBITDA, and most of them lean toward the higher end of that spectrum. Pro forma EBITDA for the YTD sample averages $38.3 million. LCD typically does not capture much of the middle market pro rata segment, nor most club-style credits.
Yet even the YTD LBO data shows that more debt is raining down on smaller companies. In another first, middle-market LBO leverage equals that of large LBOs: 5.34x to 5.29x, respectively, or a flat 5.3x, when rounding.
Regardless of the limited sample, the data supports a broader view that leveraged lending in the middle market is changing. Syndicated deals are on the decline, while less visible, club-style credits are in. Waves of money are pouring into funds and managed accounts from new players, arrangers say. Senior stretch and unitranche credits are more rampant than before.
The YTD middle-market senior multiples help tell the story. Senior debt accounts for 4.8x of the 4.9x total multiple in the capital structure. For middle-market LBOs, senior is 5.2x of the 5.34x total.
LCD’s senior multiples include second-lien term loans, which account for 9.6% of all YTD institutional volume in the middle market, up from 4% last year and the highest level since 2008.
The difference between senior stretch and unitranche, by the way: Senior stretch is all-first lien to about 4-4.5x depending upon the size of the issuer, many would agree. Unitranche offers leverage beyond that level and can include subordinated or last-out strips within the same loan agreement that can produce greater yields.
Looking ahead, arrangers say fourth quarter pitches are 4x by 6x. One silver lining: expect a pickup in volume by November.
For this analysis, middle market entails issuers with EBITDA of $50 million or less. – Kelly Thompson
Follow Kelly on Twitter @MMktDoyenne for middle-market financing news