Banks bring out checkbooks for leveraged buyouts as rates fall

(Bloomberg) — Investment banks, forced to take big writedowns on risky M&A loans after a global rise in interest rates, are now turning to leveraged buyouts, one of the most lucrative areas of finance. .

Traditional lenders and private credit managers are telling private equity firms, known as sponsors, that they can provide more than $15 billion in debt with a single junk-rated deal. That’s about 50% more than last year, according to some market participants, when several loans were stuck on lenders’ balance sheets after central banks aggressively raised rates to control inflation.

“The art of what sponsors can raise globally has grown significantly over the past year,” said Dominic Ashcroft, head of leveraged finance for EMEA at Goldman Sachs Group Inc. “The loan and bond markets have grown so much in Europe like in the United States. , in terms of what is achievable and possible. If we add to that a portion of private credit, we are approaching the mark of between 13,000 and 15,000 million euros.”

As the global economy cools, Wall Street’s LBO commission-generating machine is starting to spin again.

Banks are putting losses on outstanding debt in the rearview mirror, after a period in which credit appetite shrank following Russia’s invasion of Ukraine and interest rates soaring. In the United States, deals are picking up as the Federal Reserve’s first interest rate cut in four years boosts market sentiment. Lower borrowing costs will allow private equity firms to increase the amount of debt they can service, making them more competitive when bidding for targets.

About $2.4 trillion worth of mergers and acquisitions have been announced so far this year, up 22% from the same period in 2023, according to data compiled by Bloomberg. Some of the high-profile acquisitions on lenders’ radars are for French drugmaker Sanofi’s consumer health division – with a deal potentially valuing the unit at around 15 billion euros ($16.6 billion) – and the German generic pharmaceutical company Stada Arzneimittel AG, where there has been talk of a valuation of approximately 10 billion euros ($11 billion).

Investment bankers are promoting comprehensive packages of senior loans, bonds and junior debt for deals, said people with knowledge of the matter, who asked not to be identified because the discussions are private. Competition is already impacting margins, with senior lending to well-regarded B-rated European companies at about 350 basis points above the benchmark, down about 100 basis points from last year, the people said.

Lenders can provide leverage “levels of 7.0x and above, something that would not have been conceivable 12 to 18 months ago,” said Roxana Mirica, head of capital markets in Europe at private equity firm Apax Partners LLP. That returns them to levels that were common before the debt saga.

If all credit levers are used, the creditworthiness of a deal can reach more than $15 billion. In Europe, sponsors could raise about €2 billion in euro loans, double what they did last year, and about €2 billion in senior euro bonds, according to some market participants. Buying firms could also access about $5.5 billion in senior loans and $3.5 billion in bonds in the US, and eventually about £2 billion could be added as junior capital from private credit firms, they said. the people.

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Larger private credit lenders, such as Goldman Sachs Asset Management and Blackstone Inc., are increasingly able to work with banks on financing deals, according to Fergus Wheeler, a partner at law firm Latham & Watkins in London.

“The sheer flexibility of their investment mandates allows them to offer sponsors and companies a wide variety of intelligent capital solutions,” Wheeler said.

Still, there are reasons to remain cautious.

While the US market has seen an increase in leveraged buyout transactions in recent weeks, not all transactions have gone well. In August, a banking group led by Jefferies Financial Group Inc. lost about $15 million after being forced to improve the terms of a leveraged loan to M2S Group Intermediate Holdings Inc. More recently, lenders led by Bank of America Corp. sold a loan leveraged by the acquisition of GSM Outdoors at the deepest market discount in 2024, after cutting the size of the financing package and improving conditions for the second time.

–With assistance from Paula Seligson.

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