content

In Europe, Second-Lien Loans Grow in Favor, at Expense of High Yield Bonds

europe second lien volume

The market for second-lien leveraged loans in Europe has increased to the extent that it often offers a real alternative to high-yield bonds.

This has become the case even if demand for this relatively risky type of debt tends to be credit-specific, and even if the costs for second-lien are higher (they are).

But for borrowers in a strong position or that are well known to market, the spread over LIBOR paid by issuers on second-lien loans has narrowed enough that – when combined with the product’s inherent flexibility – it is an increasingly appealing subordinated capital choice for private equity sponsors, market players say.

The depth of demand for the product was illustrated recently when Sivantos wrapped a €500 million second-lien to take-out the major part of a bridge loan previously destined for high-yield. The size of this deal underlines how second-lien has moved from a niche and relatively minor source of capital to the mainstream – even if sources caution few borrowers have the same pull as the hearing-aid maker.

LCD data shows an increase in both deal size and volume, though these remain significantly short of those seen prior to the crash. This is because second-lien issuance is now frequently privately placed, whereas it was almost always syndicated in the pre-crash years. As such, when pre-placed deals like Sivantos are captured in the data, it is clear there has been a surge in second-lien volume over the past year.

As its name implies, second-lien debt is repaid after the more-senior, first-lien debt is repaid, making it inherently riskier. – David Cox

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

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.

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

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.

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

 

content

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.

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

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

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

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

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

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

 

content

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.

Are you press, and would like more info on this analysis? Contact Tahmina Mannan or Farhan Husain.

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

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.

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.

content

Amid Surge of Deals, Risk/Reward on US Leveraged Loans Hits 6-Year High

Long-suffering investors in the $1 trillion U.S. leveraged loan market saw some relief in 2018’s second quarter, as the reward for participating in LBO loans, vs the risk incurred, hit its highest level in six years, according to LCD.

For this analysis LCD employed yield per unit of leverage (YPL) to gauge risk/reward, and looks only at loans backing LBOs.

Specifically, in the second quarter, U.S. loan investors saw an average 126 bps of YPL on LBO loans offered in the syndications market, up sharply from 95 bps in the first quarter. To calculate YPL, the yield to maturity of a credit is divided by the deal’s total leverage (debt/EBITDA).

It’s important to note that this increase was almost entirely a result of higher credit spreads in the market, as opposed to an increase in LIBOR, on which U.S. loan pricing is based (three-month LIBOR climbed steeply in Q1, but largely held steady in Q2).

The brighter risk/reward scenario for U.S. loan investors came as cash inflows from retail players – via loan funds and ETFs – slowed, compared to heavy net deposits earlier in the year. The relative slowdown, combined with a hefty $25 billion of LBO loans entering the market in May and June, had investors in the rare position of calling some shots during the syndications process in July, forcing increasing numbers of issuers to sweeten pricing and/or alter terms. Hence the notable increase in YPL (and spread per leverage).

After a slow start, however, loan issuance in the latter half of July has picked up, with issuer-friendly price flexes resuming, so it will be interesting to see how the risk/reward profile in the leveraged loan market shifts going forward. – Staff reports

This story was abstracted from a longer piece of analysis by LCD’s Marina Lukatsky.

Try LCD for Free! News, analysis, data

Follow LCD on Twitter.

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.