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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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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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A Wireless Preps $50M Leveraged Loan Backing Dividend to Lone Star

A Wireless is the latest leveraged loan issuer to raise debt backing a dividend for its private equity sponsor.

UBS will hold a lender call at 3 p.m. EDT on Wednesday to launch a $50 million incremental B term loan for A Wireless, according to sources.

The company was last in the loan market in April with a $575 million, six-year TLB that backed a dividend recapitalization. Pricing came at L+600 with a 1% LIBOR floor, and the loan is governed by a total leverage covenant. Amortization is set at 2.5% for the first three years and 5% thereafter.

Existing facility ratings are B/Ba3, with a 3 recovery rating from S&P Global Ratings. Corporate ratings are B/B1, with stable and positive outlooks. The borrower is LSF9 Atlantis Holdings LLC.

Dividend deals have returned to the U.S. leveraged loan market of late, as borrowers take advantage of renewed supply-shortage of paper in which to invest. There were nearly $3 billion in loans backing dividends in July – up from $2 billion in June. And already in August, typically a sleepy month for the U.S. credit markets, there is some $1.4 billion in dividend deals, according to LCD.

Greenville, N.C.–based A Wireless operates as a retailer of Verizon Wireless products and services. Lone Star is the sponsor. — Jon Hemingway

You can read more about how dividend loans work in LCD’s online Loan Market Primer.

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Amid Investor Demand, Private Equity Shops Tap Loan, High Yield Bond Markets for Dividends

european dividend volume

Private equity shops have been taking advantage of investor demand in the European leveraged finance space to pay themselves some hefty dividends in 2017.

So far this year, PE firms have recouped €4.2 billion of cash via the European leveraged loan market and €1.3 billion via the European high yield bond market via dividend deals, according to LCD. At €5.5 billion total, this is already higher than all post-crisis full-year figures, other than the €6.1 billion in 2013. During all of 2016, sponsors took out roughly €3.4 billion via the leveraged finance market (€2.8 billion via loans, and €655 million via bonds).

Dividend/recaps is one form of opportunistic issuance that blossoms when the leveraged finance market is especially hot (i.e., when institutional investors are flush with cash, and eager to put that money to work). Consequently, private equity shops can lever-up portfolio companies with the newly incurred debt, paying themselves often hefty dividends in the process.

You can read more about dividend/recaps in LCD’s online Loan Primer/Almanac (it’s free).

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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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This story first appeared on www.lcdcomps.com, 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.