Investment banks, forced to take big writedowns on risky merger and acquisitions loans after a global surge in interest rates, are now jumping back into leveraged buyouts (LBO) – one of the most lucrative areas in finance.
Traditional lenders and private credit managers are telling private equity firms, known as sponsors, that they can provide more than US$15 billion of debt on a single junk-rated deal. That’s about 50 per cent more than last year, according to some market participants, when a number of loans were stuck on lenders’ balance sheets after central banks aggressively hiked rates to tame inflation.
“The art of what is possible for sponsors to raise globally has grown significantly over the past year,” said Dominic Ashcroft, head of EMEA leveraged finance at Goldman Sachs. “The loan and bond markets have grown in both Europe and the US, in terms of what is achievable and possible. Throw on top of that a slice of private credit and you’re getting towards the 13 billion euro (S$18.6 billion) to 15 billion euro mark.”
As the global economy cools, Wall Street’s fee-making LBO machine is starting to crank up again.
Banks are putting losses from hung debt in the rearview mirror, after a period where lending appetite was crimped following Russia’s invasion of Ukraine and as interest rates soared. In the US, dealmaking is ticking up as the first Federal Reserve interest rate cut in four years boosts market confidence. The lower borrowing costs will allow private equity firms to increase the amount of debt they can service, making them more competitive when bidding for targets.
So far, about US$2.4 trillion worth of mergers and acquisitions have been announced this year, up 22 per cent from the same period in 2023, according to data compiled by Bloomberg. Some of the high-profile buyouts on lenders’ radars are for French drugmaker Sanofi’s consumer health division – with a deal potentially valuing the unit at about 15 billion euros – and German generic drugmaker Stada Arzneimittel, where there’s been talk of a roughly 10 billion euro valuation.
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Investment bankers are touting all-in packages of senior loans, bonds and junior debt for deals, people with knowledge of the matter said, asking not to be identified because the discussions are private. The competition is already impacting margins, with senior loans for well-regarded single B rated European companies pricing at about 350 basis points over the benchmark, about 100 basis points lower than last year, the people said.
Lenders can provide leverage “levels of 7.0x and in excess of that, something that wouldn’t have been conceivable 12-18 months ago”, said Roxana Mirica, head of capital markets in Europe at private equity firm Apax Partners. That puts them back at levels that were common before the hung debt saga.
By pulling all the lending levers, loan capacity on a deal can stand at more than US$15 billion. In Europe, sponsors could raise about 2 billion euros of euro loans, twice the level of last year, and some 2 billion euros of senior euro bonds, according to some market participants. Buyout firms would also be able to access about US$5.5 billion of senior loans and US$3.5 billion of bonds in the US, and finally about £2 billion (S$3.4 billion) could be added on as junior capital from private credit firms, the people said.
The biggest private credit lenders such as Goldman Sachs Asset Management and Blackstone are increasingly able to work with banks on financing deals, according to Fergus Wheeler, a partner at law firm Latham & Watkins in London.
“The sheer flexibility of their investment mandates allows them to provide sponsors and corporates with a wide variety of clever capital solutions,” Wheeler said.
Still, there are reasons to remain cautious.
While the US market has seen an increase in leveraged buyout deals in recent weeks, not every transaction has gone well. In August, a bank group led by Jefferies Financial Group lost about US$15 million after being forced to sweeten terms on a leveraged loan for M2S Group Intermediate Holdings. More recently, lenders led by Bank of America sold a leveraged loan for the acquisition of GSM Outdoors at the market’s biggest discount of 2024, after both cutting the financing package’s size and sweetening terms for a second time. BLOOMBERG
