Large US LBO leverage levels climb to highest rate since crisis: S&P

  • No sub-debt in capital structure today
  • Strong environment for first-lien bank loans
  • Borrowers able to syndicate out senior debt

Debt levels on large US buyouts are approaching heights not seen since the peak era in 2007.

Leverage levels on large U.S. leveraged buyouts in the third quarter hit the highest debt-to-EBITDA ratio since the global financial crisis, according to research from LCD, an offering of S&P Global Market Intelligence.

Debt-to-EBITDA levels on borrowers with EBITDA of more than $50 million climbed to around 6x EBITDA in Q3, LCD said. The only time leverage ratios were higher was in 2007, when debt-to-EBITDA levels breached the 6x line.

“Market conditions are very favorable to borrowers at the moment,” said Marina Lukatsky, a director with LCD.

At 6x EBITDA, leverage levels are pushing up against federal guidelines set in 2013. The guidelines attempted to keep banks from financing deals with leverage levels at 6x EBITDA or more. The U.S. Treasury over the summer recommended a review and potential refinement of those guidelines.

lcd leverage levels chart

What’s different today from the peak environment in 2007 is that there is less subordinated debt in the capital structure, LCD found. Leverage through first lien bank loans is higher today, Lukatsky said.

“From the deals we see, because of market conditions borrowers can get deals with more senior debt in the structure,” she said. “Borrowers are able to get larger deals syndicated in the larger leverage market.”

According to LCD, first-lien senior debt makes up the bulk of the capital structure, coming in at more than 4x EBITDA, which has been the case since 2014. Second-lien debt encompasses a smaller portion, and then other senior debt balances out the structure.

Subordinated debt was not present in the capital structure of large LBOs in the third quarter, LCD found. That was the case for the full year 2017 and for 2016, according to the data.

Terms on leveraged financing have loosened, LCD said. “Lenders are being pushed into a covenant-lite environment by borrowers,” said Basil Karampelas, managing director in BDO’s Business Restructuring and Turnaround Services practice. This is a function of the ultra-competitive lending environment, Karampelas said. “There’s a tremendous amount of capital chasing deals,” he said. 

Total sponsored issuers’ leverage loan volume year-to-date sits at about $62 billion, according to LCD. That’s a big jump already from last year, which tallied $49.1 billion. Leverage loan volume has been climbing since the low in 2009 of $4.4 billion. The peak year was 2007, which hit $138.3 billion, according to LCD’s information.

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