Better exit options for deal sponsors and an unwelcoming high-yield bond market helped make the first six months of 2005 the busiest for lenders dealing in the sponsored finance market. Lenders doled out more money to deal sponsors in the first half of this year than any other six-month period to date, according to Dealogic. In the first six months of this year, 253 deals worth $98.4 billion were completed; a 26% rise from the first half of 2004 and a 227% increase from the same period in 2003.
"I think it partly has to do with the private equity funds having a higher degree of exit options, whether it is an IPO, a secondary buyout, a dividend recap or an outright sale of the company to a strategic buyer," said Dan Toscano, managing director and group head at Deutsche Bank. "I think there is greater comfort around those exit options than there was two years ago or even a year ago."
Another factor has been the less than stellar performance of the bond market that has been seemingly closed to some investors. Looking at Dealogic High Yield issuance numbers, there were 121 deals for about $33 billion in the first quarter of 2005, down from 169 deals for $47 billion in the first quarter of 2004. Deals for the second quarter of 2005 were down to 82 deals from 126 in the second quarter of 2004.
"In most cases, there's that dynamic, if you can't get it done in high yield, you can get it done in the second lien, so a lot of busted deals come back as second-lien deals" said Fred Haddad, Golden Tree Asset Management's lead portfolio manager. "It will see-saw back and forth; when the high yield market is wide open, we will likely see less second-lien loans." Second-lien loans are up in 2005, both in terms of the number of deals done and in pure size. In the second quarter of this year, 42 second liens were completed, totaling about $5.3 billion, as compared with 32 deals for about $2.7 billion during the same time period last year.
In the first quarter, leveraged buyout and acquisition loans made up 41% of the leveraged sponsor loans this year, while refinancing made up another 36% of that market, according to Dealogic. For all acquisitions and LBOs, there were 88 deals for about $29 billion done in the first quarter and 82 in the second quarter for about $45 billion. The value is above pace of the 60 deals done for $14 billion in the first quarter of 2004 and 89 for $26 billion in the second quarter of 2004. And some of the biggest LBOs to hit the market this year -- the $11.4 billion buyout of Sungard by a consortium of private equity funds and the $2.5 billion deal for Fresenius Medical Care's acquisition of Renal Care Group -- are not included in these numbers. Another large LBO on the horizon includes Texas Pacific Group and Warburg Pincus' $5.1 billion buyout of The Neiman Marcus Group, which is expected some time in the fall.
Whether or not these levels can sustain themselves remains to be seen. "I think the biggest variable is high yield," Toscano explained. "The market has clearly rallied, the question is, will it return to a 2004-like new issuance environment for subordinated debt where all the deals are getting priced? Most of the recent high-yield deals to price have been senior notes, which aren't quite as useful in an LBO structure. If we get regular market conditions, then I think we will see better [high-yield bond] volumes. If the current conditions persist, I don't think we will see as much activity."
US Sponsor Backed Leveraged Loans
Proportion of LBO and Acquisition
