(Bloomberg) -- 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 — 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 $15 billion of debt on a single junk-rated deal. That’s about 50% 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 Group Inc. “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 to €15 billion 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 $2.4 trillion worth of mergers and acquisitions have been announced this year, up 22% 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 ($16.6 billion) — and German generic drugmaker Stada Arzneimittel AG, where there’s been talk of a roughly €10 billion ($11 billion) valuation.
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 LLP. 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 $15 billion. In Europe, sponsors could raise about €2 billion of euro loans, twice the level of last year, and some €2 billion of senior euro bonds, according to some market participants. Buyout firms would also be able to access about $5.5 billion of senior loans and $3.5 billion of bonds in the US, and finally about £2 billion could be added on as junior capital from private credit firms, the people said.
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The biggest private credit lenders such as Goldman Sachs Asset Management and Blackstone Inc. 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 Inc. lost about $15 million after being forced to sweeten terms on a leveraged loan for M2S Group Intermediate Holdings Inc. More recently, lenders led by Bank of America Corp. 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.
Week in Review
- The biggest names in private credit have raised the most investment-grade debt ever this year, at a time when they already have record levels of cash and are fighting to stay competitive with rival banks.
- Chinese developers’ shares plunged after an unprecedented rally, fueling a broader market retreat as investors reassessed the sector’s risks.
- Companies and governments around the globe spent the past month streaming into debt markets, seizing on declining interest rates ahead of an uncertain US presidential election that many fear will spur volatility in markets.
- OpenAI tapped global banks for a $4 billion revolving line of credit on top of its recent $6.6 billion fundraising, building a massive war chest to stay ahead in the costly race to develop more sophisticated artificial intelligence.
- Jefferies Financial Group Inc. is in early discussions with investors on a roughly $1 billion financing package to support Ares Management Corp.’s potential buyout of Form Technologies from Partners Group Holding AG.
- T-Mobile US Inc. sold more than half-a-billion dollars worth of bonds backed by wireless equipment contracts after postponing the deal in August, when debt markets were roiled by a maelstrom of surprise economic, corporate and central bank news.
- Darden Restaurants Inc., the owner of chains including Olive Garden and LongHorn Steakhouse, tapped the US high-grade market for $750 million to finance its planned acquisition of Tex-Mex chain Chuy’s.
- Goldman Sachs Group Inc. executed more than £1 billion ($1.3 billion) of trades in Thames Water’s bonds in September, as it makes a market between original investors exiting the beleaguered utility and opportunistic players scooping up the debt at a discount.
- K2 Insurance Services is seeking to cut borrowing costs by swapping private debt that helped fund the firm’s buyout with a new leveraged loan.
- A group of banks led by Wells Fargo & Co. sold a $1.6 billion leveraged loan to help fund Tempur Sealy International Inc.’s proposed acquisition of Mattress Firm Group Inc.
- Private equity-backed STG Logistics reached a deal with a group of lenders that overhauls its debt stack and allows them to jump ahead of peers in the repayment priority line.
- Spirit Airlines’ efforts to restructure its debt and avoid filing for bankruptcy have hit a snag after months of talks with bondholders failed to result in a deal.
On the Move
- Carlyle Group Inc. managing director Matt Settle has left the firm to start his own fund.
- Blackstone Inc. is hiring Aneek Mamik, who previously worked at Värde Partners Inc., as head of financial services within Blackstone Credit & Insurance (BXCI). Chris Yonan is also joining as head of European infrastructure in London, having previously worked at Jefferies Financial Group in New York.
- Apollo Global Management Inc. is recruiting Aoiffe McGarry, a Citigroup Inc. veteran who headed the bank’s global asset-backed securities team.
- Macquarie Group Ltd.’s asset management arm has hired Brian Van Elslander as head of direct lending and portfolio manager for the Americas and named Sophia Alison head of direct lending for Europe, the Middle East and Africa.
- JPMorgan Chase & Co. named Scott Taylor to replace Francois Belot as the bank’s head of strategic risk transfer solutions.
- HSBC Holdings Plc has hired three directors and an associate director to join its private credit team, namely Karen Aidan, Stan Genchev, Chris Lindeque and Anastasia Ashcheulova.
- Will Joyner has joined Flat Rock Global LLC as a managing director, having previously worked at Citizens Bank as a managing director in loan sales and trading.
--With assistance from Paula Seligson.
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