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Private equity takes the supersize option

Multi-billion dollar leveraged buyouts are back with a bang, spurred on by low funding costs in the loan market. But with high yield faltering, can private equity firms and their financiers stomach the risks, or could these deals be the distressed loans of tomorrow? Kathryn Tully reports.

From spin-off to buyout: How Sungard became a record-breaking deal

WHAT'S THE GUILTY secret that Wall Street corporate financiers don't want to share? "Around here we say, 'don't tell anyone who buys leveraged loans that the high-yield market has backed off'," jokes a senior US leveraged finance banker about his market.

The way things are going, it might soon be no laughing matter.

In March, the US high-yield market suffered its worst performance in three years. More than $3 billion of capital has flowed out of high-yield mutual funds in recent weeks. There's been no LBO-related high-yield deal in the market since Canadian doormaker Masonite's offering was postponed and bond spreads have widened on average 50 basis points in recent weeks.

By contrast, the leveraged loan market is looking in great shape – so healthy, in fact, that private-equity sponsors are being encouraged to pay higher valuations for increasingly large buyout targets. Right now, as they are shut out of the high-yield market, sponsors are reliant on cheap leveraged loans, and, increasingly, on the fact that hedge funds will buy them.

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