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Amid Deal Frenzy, M&A Leveraged Loan Issuance Shoots to Record High

M&A was the catalyst behind a jump in institutional leveraged loan issuance in the second quarter, which totaled $144 billion as of June 26, eclipsing the $129 billion in 1Q18, according to LCD. That would make the past three months the busiest for institutional issuance since the record $171 million in 1Q17, and the third-highest quarterly figure ever.

Throw in pro rata activity—revolving credits and amortizing term loans—and total volume this quarter is $198 billion, the second-highest amount on record, behind the $209 billion in 1Q17.

mna loan issuance

About that M&A: Institutional leveraged loan issuance for this purpose hit a record $83.9 billion in the second quarter, or 58% of all U.S. institutional issuance. The last time M&A came close to the 2Q total was the second quarter of 2007, at $82.9 billion. – Jon Hemingway

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Asurian Floats $3.75B Leveraged Loan Backing Dividend to Private Equity Sponsors

In one of the largest credits of its kind, a Bank of America Merrill Lynch–led arranger group has launched a $3.75 billion covenant-lite term loan package for Asurion that will be used to fund a return of capital to shareholders, according to sources. Commitments are due by noon EDT on Wed., June 27.

Dividend deals such as Asurion are seen as opportunistic issuance in the U.S. leveraged loan market, meaning issuers – or their private equity owners – take advantage of investor demand to originate credits, the proceeds of which are returned to the owners. The U.S. leveraged loan market has been red hot of late as investors crowd the floating-rate asset class thanks to ongoing and expected interest rate hikes.

The loan package includes a new $2.25 billion B-7 term loan due November 2024 and a $1.5 billion add-on to the company’s second-lien term loan due August 2025.

Price talk on the first-lien is L+300, with a 0% LIBOR floor and an OID of 99.5. That indicates a yield to maturity of about 5.55%. Lenders are offered six months of 101 soft call protection.

The second-lien guidance is L+675, with a 0% floor and an OID of 99–99.5. At talk, the yield ranges from 9.51–9.61%. Hard calls will be reset to 102 and 101.

A consent fee of 50 bps is offered to first-lien lenders and of 75 bps to second-lien lenders.

The arranger group includes Morgan Stanley, Goldman Sachs, Barclays, Credit Suisse, and Deutsche Bank.

Agencies affirmed Asurion at B+/B1, with stable outlooks, following the announcement of the share repurchase. First-lien facility ratings are B+/Ba3, with a 3 recovery rating from S&P Global Ratings. The second-lien is rated B–/B3, with a 6 recovery rating.

The issuer will also increase its revolver to $230 million and extend maturity by one year to 2023, agencies note.

Existing debt at Asurion includes its $2.6 billion TLB-4 due August 2022 and $3.2 billion TLB-6 due November 2023. Those existing term loans are priced at L+275, with a 0% floor. The original $1.8 billion second-lien term loan was placed a year ago to refinance the existing facility.

Asurion is a provider of wireless handset insurance products. The company is backed by Madison Dearborn, Berkshire Partners, Providence Equity Partners, and Welsh, Carson, Anderson & Stowe, which acquired to business in 2007, as well as other investors, including The Canadian Pension Plan Investment Board. — Jon Hemingway/ Richard Kellerhals

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

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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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Europe: As Leveraged Finance Market Rolls on, Dividend Deals Near Pre-Crisis Levels

europe dividend loans hy

Private equity shops are paying themselves dividends via junk bonds and leveraged loans in Europe at a rate not seen since before the financial crisis.

Total issuance of debt which backs dividends, all or in part, in these segments (which comprise the overall leveraged finance capital markets) has hit €18.7 billion so far in 2017, nearly matching the record €20.3 billion logged in all of 2007, according to LCD. The recent activity  more than triples the amount seen last year, while the increase funded specifically by high yield bonds is even more dramatic.

High profile activity has reflected this dynamic, with sponsors taking dividends via the bond market over the past month for portfolio companies Lowen PlayRaffinerie HeideHaya Real Estate, and Verisure, with the latter using both the loan and bond market to pay owners a €1 billion dividend (which is on course to be the largest debt-funded shareholder payment since unsponsored Ziggo paid its owners €2.8 billion through a cross-border bond financing in September last year). Demonstrating just how high risk appetite is, the Verisure financing contained a €980 million, CCC+/Caa1 tranche.

To be sure, loan and bond issuance for deals backing dividends has soared. And the amount specifically used for to fund the dividend – as opposed to another recap-related purpose – has likewise climbed, totaling €7.6 billion so far this year, more than twice the amount during all of 2016, according to LCD.

Dividend deals, of course, are more prevalent during overheated credit markets, when institutional appetite for loan or high yield paper outweighs issuance in the sector. While investors generally do not like the idea of a sponsor leveraging up a portfolio company, then extracting cash before the lending institution has been repaid, they often acquiesce, to maintain a good relationship with the sponsor – which are frequent borrowers – and because, in hot credit markets, another investor will almost certainly be willing to step in, if one should drop out. – Staff reports

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With Investor Demand Intense, Private Equity Shops Tap Leveraged Loan Mart for Dividends

pe dividends

Private equity shops paid themselves $4.76 billion in dividends via leveraged loan recapitalizations in 2017’s third quarter, bringing the year-to-date total for this activity to $15.31 billion, nearly matching the tally for all of 2016, according to LCD.

This high-profile recap activity is a sign of the times in today’s still—overheated leveraged loan market.

Deals such as these typically proliferate when there is excess investor demand, allowing borrowers to undertake “opportunistic” issuance, such as corporate entities refinancing debt at a cheaper rate or, here, PE firms adding debt onto portfolio companies, then paying themselves an often hefty dividend with the proceeds.

This excess demand scenario has been the case over the past year or so, as institutional investors have piled into U.S. loan funds and ETFs in anticipation of rate hikes by the Fed, which typically benefit a floating-rate asset class such as leveraged loans. While these inflows to loan funds have stalled of late as the outlook for additional rate hikes has dimmed, there remains a net $14 billion of fund inflows in 2017, according to Lipper, meaning investor demand for leveraged loan paper continues intense.

Hence the relative surge in dividend deals, which are popular with private equity firms, for obvious reasons.

They can be less so with loan investors, as the PE shop’s portfolio company puts additional debt onto its balance sheet. However, institutional investors are keen to maintain strong relationships with private equity shops, which borrow frequently, so in bull credit markets these deals continue to find a home. – Tim Cross

You can read more about dividend/recap deals in LCD’s Loan Market Primer.

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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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