The U.S. and Europe have traded places when it comes to LIBOR spreads on buyout loans thanks to the liquidity flooding the U.S. market. Average pricing for leveraged buyout loans backed by financial sponsors in Europe were 345 basis points in 2006 against 328 for U.S. deals--the first time European pricing has been higher in the last seven years, according to recent Dealogic data.
"If the spreads are narrower here than they are abroad it's because of a liquidity driven market," said Terrence Dwyer, senior v.p. and credit analyst at KDP Advisors. "Liquidity is exceptionally strong." The tightening of the European Union-U.S. spread in average pricing from 2005 to 2006 has correlated inversely with the difference in average deal size, in both the U.S. and the EU, which increased from a $179 million in 2005 to $275 million last year, according to the data.
Dealogic named HCA's $16.8 billion buyout in November and the $10.75 billion buyout for Capmark Financial Group /GMAC as some of the bigger deals in the U.S. market in 2006. The buyout of Coral Eurobet's $5 billion LBO rounded out the list for the Euro side.
"Everything is priced for perfection," said one buysider. "I haven't seen anything like this in quite awhile." The last time EU spreads came close to overtaking the U.S. average was in 2004, when both hovered just north of the 350 basis points mark. The biggest gap in margins occurred in 2002, when the average spread for U.S. LBOs hit its seven-year high point at around 400 basis points while the EU stayed closer to the 300 mark. Since then, spreads in the U.S. have declined to around the 350s and EU spreads have varied from 300 basis points in 2003 to 350 in 2004 and the 320s in 2005.
"Even term debt that is coming, in many cases is being negotiated lower," Dwyer said. "Not refinanced, just simply negotiated lower and that's clearly a result of liquidity." The recent LBOs for Aramark and Freescale Semiconductor both came in with price talk far below the 300 basis point mark and actual pricing ended up even lower due to investor demand and market liquidity. Pricing on Aramark's $3.155 billion term loan "B" was cut to LIBOR plus 212.5 basis points from LIBOR plus 225 basis points while Freescale's $3.5 billion term loan priced down to LIBOR plus 2% from LIBOR plus 2 1/4% before it broke for trading.
Last week's debut of $8 billion plus worth of loans for Univision's buyout by a consortium of private equity groups came in with price talk far below the U.S. average at around 2 1/4-2 1/2% for the first lien and 2 3/4-3% over LIBOR for the second (see story, page 3). With the excess liquidity prevalent in the market today, larger deals like the $21.8 billion buyout deal for Kinder Morgan, led by Goldman Sachs, Citigroup, Deutsche Bank Wachovia and Merrill Lynch, and the proposed $25 billion buyout for Harrah's, led by Bank of America and Deutsche Bank, have the ability to pull the spread margin down even further. Projected pricing for the deals could not be determined.
