The buyout deal market, resurgent since late 2009, finished strongly in 2010, leveraged lenders report, adding that they expect to see continued strength this year, and more competition, including banks, which have begun to return to the market.
Part of the motivation for dealmaking in 2010 was the anticipated expiration of bargain-basement capital gains tax rates, which prompted a flood of deals, said John G. Martin, the president and chief executive officer at GE Antares Capital, a big senior secured lender in Chicago. “It may be the highest I’ve ever seen in my career in the last six months and especially in the fourth quarter.”
Sponsor equity checks are running 35 percent to 45 percent of a deal’s value. Senior debt multiples are creeping up, with typical deals in the mid-market now getting 3x to 3.5x turns of EBITDA for senior debt and total leverage of 4.5x to 5x, including mezzanine financing, Martin said. “Equity checks are very healthy, and in our mind appropriately so.”
Depending on the size of the borrower and the credit quality of the company, Libor plus 450 to 500 basis points with a 150 floor is still achievable, Martin said. “Margins could contract a little bit,” he said. “The spreads that we and other arrangers are experiencing may come under some pressure in the next year.”
A last-minute compromise in Washington, D.C., extended the Bush-era tax rates for two more years, which eased some of the pressure for New Year’s Eve deal closings. But many deals already had closed, and continued economic growth in 2011 should help.
“Everything is looking up,” said Christopher G. Williams, senior managing director at Madison Capital Funding LLC and a co-founder of the Chicago leveraged lender, the private equity financing arm of New York Life Investment Management Holdings LLC. “Default rates are down. They are expected to stay down. We see improvements in portfolios.”
On the day of Williams’s interview with Buyouts, Madison Capital had three closings, he said. The firm also has been active sending out term sheets for the new year, which indicates that deal makers see the momentum continuing. “The outlook is better now than even a month ago,” agreed Jason Van Dussen, the managing director of capital markets at the leveraged finance lender Golub Capital Inc., in a mid-December interview.
“People are spending a little bit more money, whether it’s at restaurants or holiday spending,” Van Dussen said, terming the current environment “a new normal” after the booms and busts of the past decade. “There’s a long way to go, but people have adjusted to saving more and spending less.”
Leveraged lenders also say to expect the return of bank lenders to help finance deals in 2011. With the credit crisis easing, banks seem to be growing more comfortable with the market, which was rocked by defaults in 2008 and 2009.
Fifth Third Bancorp of Cincinnati has become more active since adding a sponsor finance team in late 2009, as has PNC Financial Services Group of Pittsburgh. Although both are considered regional banks, their leveraged lending operations span the country. Huntington Bancshares Inc. of Columbus, Ohio, also has emerged as a competitor on some deals, and Bank of Ireland remains active in bidding to finance deals, even though it had to accept a €2.2 billion ($2.9 billion) bailout in November from the European Union and International Monetary Fund, said Williams of Madison Capital.
“Banks across the board are more active,” said Golub’s Van Dussen. On one recent deal, Golub was offering financing of Libor plus 550 with a 150 floor, but lost out to a bank that was offering L+400-450 with no floor. (He declined to identify the lender or the buyer.)
“They might beat us on the cost of capital,” Van Dussen said. “We think they left a lot of margin on the table.”