Two years after the economic crisis, leverage for buyout deals is increasing toward levels last seen at the peak of the boom in 2006 and 2007, speakers said at the Buyouts New York conference in late April.
“High-yield is stronger than the peak of 2007,” said Scott Sperling, a co-president of the Boston buyout shop
And after a slow first quarter, when deal flow was down 40 percent sequentially from the fourth quarter of 2010, the pace of activity is picking up, with lenders and bankers predicting an active year.
The Chicago lender GE Antares Capital is seeing deals that were drawing 3x EBITDA of total leverage six months ago today are getting 3.5x senior and another 1.5x of sub debt for total leverage of 5x EBITDA, said Mike Chirillo, a senior managing director at at the lender, although he emphasized he was speaking only of high quality mid-market deals. That said, he added, for companies that have higher EBITDA, total leverage is going to 5.5x EBITDA.
Things are even more competitive at another Chicago leveraged lender, Madison Capital Funding LLC, the private equity financing arm of New York Life Investment Management Holdings LLC. David Kulakofsky, senior vice president at Madison Capital, said he is seeing 5x to 5.5x EBITDA on senior debt in some cases and total leverage as high as 8x EBITDA. “The level of aggressiveness in terms of leverage is definitely here to stay,” Kulakofsky said during a panel discussion on debt financing.
Even so, equity contributions remain strong, with the sponsors of even large-cap borrowers providing 30 percent to 40 percent of the capital structure, Chirillo said. “Sponsors are still putting their money where their mouth is.”
“I think we’ve gone back to levels of 2007 very quickly,” said Andrew Steuerman, a senior managing director at the New York leveraged finance lender Golub Capital Inc., citing sidelined cash both in buyout shops and strategic investors for the high levels of equity contributions. “The big difference is that the purchase prices being paid are so high, because of the private equity overhang, you’re not seeing 30 percent or 25 percent, you’re seeing 40-plus. But you are seeing 5x leverage.”
High-growth, higher-risk companies are needing equity contributions of 40 percent or more, but those with more stable EBITDA can get financing with 30 percent equity, Kulakofsky said. “I think you’re going to see more and more deals with equity contributions in the low 30s.”
But ready credit can be a two-edged sword for sponsors.
“We have found it to be a very good market to sell at this time…It’s been a difficult market in which to buy,” said T.J. Maloney, the president of New York buyout shop