Hints of Life in Leveraged Loans
LBO finance mart perks up as new deals start to launch, though activity still tends to be in small deals
By Kelly Holman June 9, 2008
"LBO speculations are back."
So claims a recent Citigroup Bond Market Round Up report.
"It strikes us that there is still an appetite for leveraged paper to be sold with respect to some of the larger LBO deals that still have not closed," says John Fenn, director of high yield strategy at Citi.
New issues are slowly, but surely, also starting to make their way into the market.
Take, for instance, The Carlyle Group's new $800 million financing commitment from Bank of America, Lehman Brothers and Credit Suisse, which supports its $2.5 billion acquisition of McLean, Va.-based consultancy Booz Allen Hamilton. While one new deal does not constitute a trend, nor does its size approach that of the mega deals of 2007, the transaction is significant because it is one of the few private equity-sponsored financing packages to be launched lately, according to observers.
Credit market participants are cautiously optimistic that despite challenging market conditions, acquisition financings are beginning to percolate through the market.
Tygris Commercial Finance Group, a recently formed Parsippany, N.J.-based commercial finance company backed by $1.7 billion in equity from a stable of well-established private equity firms, arranged $562.5 million in senior secured debt financing from Credit Suisse, Wachovia, Barclays and SunTrust, and $100 million from Wells Fargo to complete its acquisition of Parsippany, N.J.-based US Express Leasing from DLJ Merchant Banking Partners on May 29, according to Steven Kluger, executive vice president of capital markets and corporate strategy at Tygris Commercial Finance Group. Tygris is backed by Aquiline Capital Partners, New Mountain Capital, TPG, Diamond Castle Holdings, Hamilton Lane and DLJ Merchant Banking.
Citigroup's Fenn says, however, that it will take some time for the market as a whole to get comfortable with new leveraged buyout issuances, particularly issuances with the lofty multiples of 2007. "It will be a while before we see an eight times Ebitda leverage deal come to market."
Meanwhile, lenders are also working with existing borrowers that are looking to re-jigger credit agreements of portfolio companies, although with more restrictive terms and at increased pricing, say veteran credit market professionals. "In cases where companies are going through their covenants it's become particularly difficult. Lenders are exacting a lot of economic value out of the covenant breach," says one loan capital markets executive at a bulge-bracket institution who declined to be identified.
CI Capital Partners, a New York private equity firm, obtained $700 million of new debt for its financially-challenged residential siding portfolio company Ply Gem Industries, an issuance that was upsized in pricing from Libor plus 275 basis points to Libor plus 675 basis points, says the capital markets source.
There's little disagreement that smaller financings are generally easier to obtain for deals below $1 billion, according to industry participants.
"Anything under $1 billion is generally something that can get done as it requires fewer banks and it's significantly less risky," says Brett Barragate, a commercial finance attorney at Jones Day. "We're seeing a modest return to some level of activity, but it still tends to be on the smaller deal size," he adds.
Chris Williams, managing director and co-founder of Harris Williams & Co., a Richmond, Va.-based middle market investment bank, is sanguine about deal financing prospects for the mid-sized deal spectrum.
"We're definitely seeing more lenders come back into the market," Williams told an audience at the firm's M&A Outlook Roundtable event held at New York's Plaza Hotel this past week.
The investment bank noted in its presentation that there are still 30 to 40 middle-market lenders comprised of both traditional banks and specialty finance houses including Allied Capital, Bank of America, Bank of Ireland, BNP Paribas, GE Antares, Madison Capital Funding and PNC Bank that are active in the market.
High yield bond issuance, meanwhile, approached $27 billion in the second quarter with more than $20 billion generated in the quarter, though it is less than half the $72 billion of junk bonds issued in the second quarter of 2007, according to data from Reuters LPC.
The overhang of leveraged loans has declined to $87.3 billion from $156 billion at the end of last year, whereas the backlog of high yield bond issuance has declined to $64.3 billion from $75.5 billion from Jan. 1, according to Standard & Poor's S&P Leveraged Commentary and Data.
"The market has settled into equilibrium right now and there's a window of opportunity to bring newly structured deals," says Chris Donnelly, who tracks leveraged finance activity for the S&P unit.
"The concern for the most part is off the backlog and investors are now looking at the fundamentals of the market, defaults and where the economy is going," says one loan market source at a bulge-bracket bank. "But, whether or not its going to be a stable and upwardly rising market is not known yet," he adds.
(c) 2008 Investment Dealers' Digest and SourceMedia, Inc. All Rights Reserved.
Find out more information about people mentioned in this article from our People Database:
Christopher Williams
