Leveraged finance: Financial sponsors push boundaries
A flurry of bond deals should not disguise the fact that aggressive loans and PIKs have squeezed both high yield and mezzanine finance.
Incredible levels of investor liquidity are allowing private equity funds to weaken loan covenants, maintain high levels of leverage and obtain extremely attractive price terms on deals despite concerns about when the credit cycle will turn.
Barclays Capital research estimates that private equity firms have $160 billion to invest this year, which translates into potentially $500 billion to $750 billion of leveraged buyouts. Already this year more than $120 billion-worth of LBOs have been undertaken, compared with $360 billion in the whole of 2006. But despite the threat of huge supply, pricing is increasingly taut. First-quarter volatility has been quickly forgotten as loan and bond spreads return to all-time lows.
So in mid-April there was much optimism about the European pipeline of announced deals, with more being readied. The largest announced transaction was the $1.2 billion financing for the buyout of the UK’s Coryton Refinery by Petroplus. Morgan Stanley, Credit Suisse, UBS and Barclays Capital bookran a two-tranche (seven-non-call four and 10-non-call five) deal worth $1.2 billion in conjunction with a $565 million equity offering. Another sizeable leveraged buyout that entered the bond pipeline was that of Countrywide, which will involve £1 billion ($2 billion) of high-yield bonds being issued via Credit Suisse, Deutsche Bank and Goldman Sachs.