Levfin M&A supply is out there, it just needs a confidence boost
Banks should stop blaming issuers and start providing opportunities
Since the start of the year, the leveraged finance M&A pipeline has been pushed further and further back. It is currently not expected until the second half of the year due to the increasing gap between high interest rates and low valuations.
And as that time nears a number of new money deals are entering the levfin market, linked to dividend recapitalisations as well as M&A and LBO activity.
So with conditions so neatly primed, it is imperative that banks do more to give levfin the confidence boost it needs, while it has the opportunity. Despite the projected positivity, market participants remain pessimistic about the pipeline of new money loans, arguing that the market is still dominated by amend and extend deals, and refinancings.
For example, in the past week alone, VTU — an Austrian process engineering company — allocated a €118.5m loan for its leveraged buyout by financial sponsor Altor in April. GSF Group, the French provider of cleaning services, also closed a €446m term loan B and a €90m revolving credit facility to finance TowerBrook Capital Partners’ LBO of the company
TMF Group, a Dutch provider of accounting and human resources services owned by CVC Capital Partners, is also marketing a €1.3bn-equivalent term loan B to finance acquisitions and for refinancing.
However, it is not all doom and gloom for the asset class, some banks are proving that the M&A pipeline is up and ready to run. One senior levfin banker at a top firm said his desk has underwritten six mostly M&A related deals in April alone, as well as over 40 mandated leveraged loans and high yield bonds that are being prepared to enter the market during the next three months.
All it takes is a little confidence boost to kick start supply — and that must come from the banks. But not every bank is looking for solutions to boost their clients’ confidence.
Not many can boast the same levels of underwriting as the senior banker, and are instead, as another levfin banker told GlobalCapital, choosing to lay the blame on the “low supply from issuers".
Concerns about market volatility and the high cost of debt, in comparison to a nearly zero rate environment over much of the past decade, must first be overcome. High rates and volatility are both expected to continue but should not prevent issuance.
Yet the level of LBO activity from financial sponsors remains limited. While there has been some auction activity, it is not expected to come to the levfin market until July to September at the earliest.
In fact, sources agree that it is hard to predict with any certainty that there will even be a material difference in the second half of the year. “There is hope and investors have dry powder, but it will take a while to get people moving from the current slower activity,” said one head of leveraged credit and loan syndicate.
Investors appear open to risk and are not too shy as to engage in non-investment grade papers. There is underlying demand for new money transactions after months of A&E and refinancings dominating the market.
Theconstructive and optimistic tone that wasmisplaced at the start of the year, when new money issuance was nowhere to be found, should now replace the viral resignation that is infecting this segment of the market.
New money issues of the past weeks have proven that there is space for opportunistic activity in the levfin market, despite ongoing volatility and the higher interest rate environment. Issuers need to be provided with options that demonstrate investors are open to support new money deals. It is the bank's place to do that.