By Aaron Weinman
NEW YORK, May 30 (LPC) - Loan investors are hopeful that a recent flurry of buyouts could help stoke the pipeline of leveraged loans for the first half of the year as volumes reach historic lows.
Leveraged loan volume for the period is on track to be the weakest second quarter showing in seven years. Loan volume stood at just US$128.2bn on May 24, a far cry from US$413.5bn logged for the term in 2018 or the US$363.6bn raised in the second quarter of 2017, according to data from LPC, a unit of Refinitiv.
Stunted new issue numbers come as market makers assess concerns over global growth and trade war tensions between the US and China, while investors tailor their decisions around the US Federal Reserve’s dovish take on interest rates, which typically favors fixed-rate instruments over floating-rate loans.
“The market slowed down on the M&A side of private equity and I would attribute it to the overall economic environment,” a lawyer specializing in private equity-backed investments said. “There is still uncertainty over where the market is going, but a fair number of LBOs are getting done easily.”
The last time leveraged loan volume was this low during a second quarter was in 2012, when just US$145bn was raised. Market sources attribute this year’s slowdown to lingering effects from 2018’s fourth quarter volatility, the prolonged government shutdown in January and broader equity market swings.
That ease comes as yield-hungry investors flush with cash remain ready to plough liquidity into private equity-backed transactions that banks are eager to underwrite.
“Money is the lifeblood of transactions and there is a lot of (money) out there,” said Steven Siesser, a partner and chair at Lowenstein Sandler. “Banks are (lending) at high leverage multiples and there is tremendous liquidity for deals.”
Some US$49bn of leveraged loans this quarter were set aside for M&A-related transactions. In the middle market sponsored segment, loans backing LBOs accounted for approximately 78% of the US$3.3bn in issuance so far this quarter, according to LPC data.
Adding to that, private equity firm Carlyle courted US and European investors this week for an approximate €540m US dollar equivalent seven-year term loan that will back its 35% investment into Spanish oil and gas firm Compañia Española de Petróleos SA (Cepsa) from Abu Dhabi sovereign investor Mubadala. Meanwhile, food service distributor Imperial Dade outlined terms for a US$1.265bn seven-year debt package backing its acquisition by Bain Capital.
Retailer Smart & Final is also in the market this month, whetting investor appetite with a two-part US$790m seven-year transaction that supports Apollo Global Management’s US$1.12bn private takeover of the company. Victory Capital is shopping a US$1.13bn seven-year loan for its purchase of USAA Asset Management. And Advent International has floated terms for a dual-currency €1.785bn leveraged deal to fund its acquisition of Evonik Industries’ methacrylates business.
Despite the deepening pipeline of leveraged deals, market sources are wary of the high prices private equity sponsors are paying for their targets, and caution that the lofty valuations could haunt buyers should the credit cycle eventually turn.
“The question is (for private equity) whether the multiple you’re paying for a business, will it be there when you sell,” said a portfolio manager that specializes in middle market transactions . “Multiples are more buoyant today than it has been in years.”
A little over US$50bn has sat in the leveraged loan pipeline for the past six weeks, according to LPC data, the first time upcoming transactions have been above this threshold since July 2018, and sources are confident the present slew of LBOs may be enough to spark increased dealflow into the third quarter.
“The LBO market remains strong and the debt market for these deals are good,” the first lawyer added. “It is easy to get financing and with strong macro conditions, lenders are willing to lend alongside higher leverage ratios.” (Reporting by Aaron Weinman. Editing by Michelle Sierra and Jon Methven)