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NEW YORK, June 23 (Reuters) - US bankers say the summer may be busier than usual for sponsor-driven mergers and acquisitions, which would be good news for loan investors clamoring for leveraged buyouts to provide opportunities to put money to work.
Typically new issuance slows during summer in the leveraged loan market, but bankers report the pipeline for new M&A has been increasing.
“It’s getting stronger with big deals,” said a senior investment banker, who cited several deals with financing of more than US$2bn in the works and the potential for a deal as large as US$10bn.
There are already US$11.7bn of LBO commitments on the calendar, according to data from Thomson Reuters LPC. That includes the financing for the acquisitions of customer contact and conferencing service provider West Corp and Sealed Air Corp’s cleaning and chemicals systems unit Diversey. That volume does not include the financing for private equity firm Clayton, Dubilier & Rice’s US$2.5bn buyout of HD Supply Holding Inc’s Waterworks business unit, which was announced June 6.
Barclays, Bank of America Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank, JP Morgan and Royal Bank of Canada provided commitments for the Waterworks deal.
Credit Suisse and Goldman Sachs are leading a US$1.8bn term loan to back Diversey’s US$3.2bn buyout by private equity firm Bain Capital.
Credit Suisse is also leading a US$2.7bn term loan supporting West Corp’s buyout by private equity firm Apollo Global Management.
Still, this is not nearly enough to meet the powerful demand for this floating rate asset class, especially from investors tired of seeing the loans they are already holding reprice lower as a strong secondary market has allowed issuers to do regularly this year.
“The market is starved for new LBO paper,” the banker said.
Part of the problem is the amount of demand for leveraged loans, especially for loans backing acquisitions. Loan funds have seen inflows every week this year, except for one. Collateralized Loan Obligation creation is on track for more than US$80bn this year after some estimates put the earlier total at around US$50bn.
In addition, money from overseas including Japan and the Middle East in the form of separately managed accounts remains strong, bankers said. All this adds up to too much demand and too little supply even though LBO volume is not quite as dire as some investors make it out.
Completed LBO activity in the second quarter now totals US$24.7bn after volume hit US$23.1bn during the first quarter. This number would be the sixth-highest total since the fourth quarter of 2007. LBO volume tallied US$29.9bn during the fourth quarter of 2016, the highest since the second quarter of 2014.
Part of the problem hindering more LBO activity is that valuations are high and sponsors are limited in the amount of debt they can place on companies due to the federal government’s Leveraged Lending Guidance, which were implemented in 2013 to limit leverage.
“Even with low interest rates, it is hard to make those numbers work,” said a lender.
However, the deals that have been pushed through signify that private equity firms are finding ways to get deals done, said the banker, often through writing larger equity checks.
“The big machines are just shifting to a new paradigm where until valuations come down they are just making less money,” the banker said. (Reporting by Jonathan Schwarzberg; Editing By Jon Methven and Chris Mangham)