Auctions Could Spur Next Wave Of Buyout Loans

For all of the first quarter, investors have watched LBO activity plod along at a relatively lethargic pace, given that event-driven loan financing was widely expected to dominate the beginning of the year. As the quarter comes to an end, several company auctions in the market may set the ball rolling for increased LBO loan issuance in the second quarter.

On the auction block currently are Big Lots and Insight Communications, underscoring what could be the beginning of a wave of billion-dollar LBOs. Big Lots, which has put itself on the auction block to fetch roughly $4.8 billion, began reviewing bids from several private equity firms with the assistance of Goldman Sachs, sources said.

Bankers from financial sponsors groups have noted that in recent months, private equity firms have begun to team up like never before. TPG and Bain Capital closed ranks in a competing bid for Big Lots against fresh interest from powerhouses Leonard Green & Partners and CVC Partners, sources said.

Alongside Big Lots’s auction, telecommunications company Insight Communications also has been placed on the block by sponsor The Carlyle Group. The deal could fetch between $3.5 billion to $4 billion, according to sources. Bank of America and UBS will begin reviewing bids shortly.

Both auctions bode well for the leveraged loan market, which, so far this year, has been the beneficiary of only a limited number of LBO transactions in the $3 billion to $5 billion area such as J Crew Group and Del Monte. As LBO deals push the $4 billion envelope, investors can look forward to taking down meatier slices of buyout loans once syndications begin.

“The $5 billion range is the sweet spot for an LBO right now” said a financial sponsors banker. With an expected uptick in size and volume for LBOs, many bankers are predicting that new loan issuance will double that of the prior year.

In the first quarter of 2011, many lenders and investors felt that the loan market was dominated by the refinancing wave. Since January, $91 billion in institutional loans have been issued, according to Thomson Reuters LPC. Of that, $61 billion has come in the form of refinancings, or 67 percent of all issuance.

But with the refi wave disrupted by softness in the overall market, investors remain hungry for supply and would particularly lap up the opportunity to put capital to work in new deals. In spite of robust demand from loan buyers for their deals, sponsors are not yet ready to aggressively lever up a new deal just to get it done.

“Buyers don’t want to overpay and sellers don’t want to sell at discounted values,” said another financial sponsors banker. “This has created a larger spread of expectations amongst buyers and sellers.”

Although the cat and mouse game continues between buyers and sellers, the pitching of deals continues to get ever so fierce. “Banks are willing to commit more capital to LBOs now, given the demand for the loans and the competition amongst banks to lead such deals,” said another banker.

When both buyers and sellers meet at an attractive price, they can be rest assured that lenders are there waiting to fund new LBOs.

Clinton Townsend is a New York-based correspondent for Reuters LPC.