Private equity groups are seizing on ultra-low borrowing costs to fund a flurry of acquisitions that will load up indebted companies with yet more loans, underlining concerns over the threat posed by excessive leverage.
BC Partners is set to borrow $480m on Thursday across two loans to fund its buyout of healthcare provider Women’s Care Florida. The deal would put the company’s adjusted debt to more than nine times its earnings before interest, taxation, depreciation and amortisation, according to S&P Global Ratings’ preferred measure of leverage, which strips out cash and adds in items like leases.
Odyssey Investment Partners is also using both first and second lien loans totalling almost $600m to fund its purchase of Protective Industrial Products, a supplier of personal protective equipment, leaving the company over seven times leveraged. Meanwhile, Clearlake Capital is buying healthcare software company nThrive’s technology division with debt totalling $600m.
Following a massive rally in debt prices, all three deals are being marketed with an all-in yield below 6 per cent for the senior loans. That marks a dramatic change from the coronavirus-induced market tumult last year, where average yields on leveraged loans spiralled to more than 13 per cent in March, according to data from the Loan Syndications and Trading Association.
Matt Mish, a credit analyst at UBS, said the dealmaking fervour “could see companies flip aggressively from raising liquidity and being mindful of their balance sheets to favouring equity holders through aggressive buyouts. That could sow the seeds for more problems in credit markets.”
Partners Group, Oaktree Capital Management and Lindsey Goldberg are also in the market with deals for companies they are buying.
Issuers largely shunned the leveraged loan market in favour of the corporate bond market in 2020, leaving a dearth of supply and hungry investors willing to accept the handful of aggressive transactions that did come to market.
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The issuer-friendly environment is expected to continue in 2021, with low borrowing costs creating attractive financing opportunities for lower-rated, leveraged companies to be bought and sold by private equity groups. So far, however, the deals have largely been constrained to companies more insulated from the Covid-19 crisis, analysts say.
“We have been doing a tonne of M&A,” said John Gregory, head of leveraged capital markets at Wells Fargo Securities, noting that some of the deals will not come to market until later in the year.
Issuance of collateralised loan obligations, which bundle up leveraged loans to back the sale of new bonds and equity, recovered in the second half of 2020. That fed demand for new loan issuance, allowing US private equity groups to deploy some of the $860bn of capital built up last year, up from $760bn at the end of 2019, according to data from Preqin.
“There is significant capital on the sidelines within private equity funds and financing costs are still extremely low,” said Steve Columbaro, a loan portfolio manager at Columbia Threadneedle. “That’s a formula for a lot of aggressive transactions.”
Odyssey Investment Partners and Clearlake Capital declined to comment. BC Partners did not respond to a request for comment.