FIXED – Leverage increases on US buyout loans after regulatory easing
(Corrects delay in 24th para.)
NEW YORK, Oct. 19 (LPC) – Leverage ratios on privately funded transactions rise again as banks compete more aggressively for lucrative private equity loans after regulators relaxed lending guidelines leveraged earlier this year.
The guidelines were put in place in 2013 to limit systemic risk and prevent a recurrence of the financial crisis, but were relaxed in February and tightened in September by the Republican administration.
In the first nine months of 2018, the guidelines’ initial limit of 6.0 times the leverage was exceeded by a record 73.1% of private equity buyout loans, up from 64.2% in 2017. This surpasses the previous market peak in 2007, just before the financial crisis, when 61.5% of transactions were completed at this level, according to LPC data.
“The chains have been removed,” said one banker.
Strong investor demand for leveraged variable rate loans outweighs a limited supply of transactions as liquidity continues to flow into the asset class in a rising interest rate environment. Toppy stock markets mean private equity firms pay high corporate valuations, resulting in higher leverage loans as banks compete for mandates.
The most aggressive high-leverage deals also set new records with 41.4% of sponsored trades leveraging more than 7.0 times. This eclipses the previous market record in 2007, when 38.5% of transactions reached this level.
Credit Suisse is currently in the market with $ 372 million in additional term debt securing a dividend to the private equity firm of enterprise software company Hyland Software, Thoma Bravo, which will put the adjusted leverage. 7.5 times, according to Moody’s Investors Service.
“Most of the time, banks now subscribe to market clearing levels rather than regulatory levels,” the banker said.
The Federal Reserve, however, expressed concern about changes in the US $ 1.1 billion leveraged loan market in September.
“Some participants commented on the continued growth of leveraged loans, the easing of the terms and standards of such loans, or the growth of this activity in the non-bank sector as reasons to remain aware of possible vulnerabilities and risks. for financial stability, “according to the minutes of the political meeting.
When the guidelines came into effect in 2013, cases involving debt-to-Ebitda leverage ratios of more than 6.0 times received unwanted additional scrutiny from regulators, including the Office of the United Nations. Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp.
Regulated banks were tasked with ensuring that all of the company’s secured debt, or half of the total debt, could be repaid within five to seven years and explaining any exceptions on transactions. “Criticized”.
This immediately gave a competitive advantage to non-directive institutions, which were able to offer higher leverage loans than regulated banks.
That advantage wore off in September, when the Fed and OCC said the guidelines were not technically rules, following comments in February by Currency Controller Joseph Otting that banks could underwrite outside the guidelines. as long as they did it prudently and had the capital to back it up. .
The easing of the guidelines gave banks that previously feared they would attract unfavorable attention, or even sanctions from regulators, carte blanche to guarantee loans with more than 6.0x leverage.
Regulated banks stress, however, that they still underwrite responsibly and without the flexible criteria that preceded the credit crunch in 2008, the bankers said.
“Our bank is really underwriting the same way,” the banker said. “But we don’t think we have to worry about regulators cracking down if we strike a deal with too much leverage.”
The $ 5.45 billion term loan backing the Envision Healthcare buyout had 7.2 times leverage, according to Moody’s Investors Service, but was marketed less than 7.0 times with adjustments of Ebitda, sources said.
The deal was signed by regulated banks such as Credit Suisse, Citigroup, Morgan Stanley, Barclays, Goldman Sachs, UBS, Royal Bank of Canada, Société Générale, HSBC, Mizuho, BMO, SunTrust and Crédit Agricole, and alternative lenders such as Jefferies and KKR Capital. Markets.
Despite a more level playing field, regulated banks are yet to erode the market advantage established by lenders, notably Jefferies and Macquarie, who were not subject to the guidelines in recent years.
Jefferies has been a major beneficiary of the lack of regulation and has held its own this year. In the first three quarters of 2018, Jefferies ranked 12th in leveraged loans in the United States according to the LPC rankings, in the same place as the previous year.
Macquarie rose to 19th in leveraged loans in the United States for the year to date, up from 25th in 2017. Nomura also increased its position in 2018, from 28th to 25th in loans to leverage.
“There have always been one or two banks ready to cross the line (LLG). Now there are just more banks on every transaction, ”said a banker at a non-compliant company.
Companies that are not required to comply with the guidelines should continue to take out highly leveraged loans, which will force regulated banks to remain competitive as alternative lenders continue to follow suit.
Jefferies is leading a US $ 740 million buyout for agricultural processing equipment maker CPM Holdings with 6.7x adjusted leverage, according to Moody’s Investors Service. The agreement supports the purchase of the company by American Securities LLC from Gilbert Global Equity Partners.
“I see these lenders and many direct lenders on just about every transaction,” said a leveraged finance lawyer. “These people are now having a huge impact on the industry, and they are not going to go away because the federal government is relaxing the restrictions.” (Reporting by Jonathan Schwarzberg Editing by Tessa Walsh and Jon Methven)