US acquisition finance: Deals change; covenants return
The brakes are on leveraged buyouts. Most deals in the US have stalled, and the few that will get done next year will be small, with very different financing.
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Some buyers have even returned their recent purchases to the public market because of the credit crunch. In order to look at the year ahead, one must look back, from a few to several years. "Covenant-lite is down. Pik features are gone. It's a banker-friendly, covenant-heavy lending regime," said Charles Nathan, partner at Latham & Watkins.
The M&A market tends to run in cycles, and the coming year will be a low point for private equity. The year to July was the high point. Private equity almost tripled its value in deals during that period.
As the credit crunch continues through next year, the presence of private equity in M&A deals will be lower. Also, the size and volume of deals can be expected to be a rather small fraction of years past.
So, what will replace these huge going-private deals? The answers are varied. Some think strategic acquisitions will play a big part, on banker-friendly terms. "It's not that strategics will take over, but they will be more successful at competing with private equity," said Mark Gerstein, partner at Latham.