- Low volume in Q1 followed turmoil in 2015
- Preferred-equity slices coming from family offices
- Lenders wary of marginal deals
Private-debt executives say the leveraged-loan market is returning to normal after the difficult conditions of late 2015 into early 2016, but lower growth expectations for portfolio companies continue to temper deal flow.
The availability of credit for larger debt deals in the broadly syndicated market had tightened substantially late last year and early this year.
More recently pricing on loans in the middle market has crept up by about 50 to 75 basis points in some places, the lenders said on April 5 at the PartnerConnect East 2016 conference at the Boston Hyatt Regency.
Scott Cullerton, director at KKR Capital Solutions Group, said he’s seeing some leveraged-loan and high-yield-debt deals returning to the market in March and early April.
“There are early indications of some return to normalcy,” he said. “Underwriters know it’s a tougher market.”
Cullerton said he’s seeing more demand from debt investors for higher quality credit. The debt market is a place with haves and have-nots, with lenders particularly wary of marginal deals, Cullerton said.
Some investors, such as the lending arm of Koch Industries, have been providing financing via tranches of preferred equity on larger-end deals, he said.
Michael Ewald, managing director at Sankaty Advisors, said the firm has seen more inbound calls from larger buyout shops looking to tap the middle market for credit. Overall, jitters about the economy are making debt investors and other lenders more cautious.
“You don’t have the expectations for growth going forward,” he said. “There’s a significant need for equity in deals. The growth concern has people sitting on the sidelines.”
Stefan Shaffer, managing partner of SPP Capital Partners, said M&A activity has been slowing globally, with lower valuations overall.
“There’s a little bit of a hangover” from brisk activity in recent years, he said. While the historical breakdown of financing is 80 percent debt and 20 percent equity, Shaffer said it’s tilting more toward 65 percent debt and 35 percent equity nowadays.
Family offices are shopping for more equity in deals as they evolve beyond direct investments and co-investments in deals, he said. To meet this demand, SPP Capital has been offering strips of redeemable preferred issues in deals.
John Liguori, managing director at Jefferies Finance, said volatility in the debt market affected some of his firm’s middle-market deals. Pricing on first- and second-lien loans moved up and volume fell.
He said the institutional market for debt has started to reopen. “The high-yield market feels like it’s getting more comfortable,” he said.
The comments came during a panel, “Debt Markets: Pricing, Sourcing and Structure of Debt Financing Now,” at the PartnerConnect East 2016 conference.
Action item: SPP Capital’s monthly middle-market update can be accessed here, http://sppcapital.com
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