As bigger M&A deal flow moves at a snail's pace these days, middle-market leveraged buyout credits are swamping the bank debt arena. Buyout firms are pushing the leverage envelope, given the improved availability of financing, said David Horing, managing director at private equity firm American Securities Capital Partners. "The market has improved and it's possible to get greater levels of debt financing than six [to 12 months ago]," he said. Recently closed middle-market LBO credits include Oreck Corp., Breed Technologies and ILC Industries, while new deals Medex and Pure Fishing are in syndication.
An improved economic outlook and quality of borrowers has also caused the more aggressive leverage. Deal leverage ranging between 23/4 to 3 times senior has crept closer to the 31/4 to 31/2 times debt-to-EBITDA range. The Oreck Corp. buyout with American Securities, for example, pushed senior leverage north of 3 times (LMW, 3/10). Horing would not comment on Oreck.
But this increased leverage does not come without a price. "Spreads have widened across most tranches of debt," Horing said. "[There's] a number of stretch senior deals being done," a banker added, noting the increase in second lien transactions and mezzanine debt. He said for deals like Behrman Capital's buyout of Woodcraft Industries, the "C" loan with a 12% fixed interest rate awarded investors a better return for the higher risk. The buyout deal for Breed Technologies also included a $100 million second lien "C" piece priced wide at LIBOR plus 10%.
But leverage and spreads will only go so far. Some lead arrangers have had to sit on large portions of the debt after investors refuse to justify the risk or after the firms refuse to concede or juice terms on the LBO credit, another banker explained. "Quality of [the] firm should mean everything," noted Randall Poliner, general partner at private venture capital and buyout firm Antares Capital Corp.