Leveraged-loan volume in the third quarter has been boosted by an increase in leveraged buyout activity, with a resulting bulge in overall leverage for deals, according to a report issued Monday by Refinitiv’s LPC research team.
In the report, Refinitiv noted that both completed and “in-process” LBO volume so far totals $23 billion in the third quarter, providing “robust” U.S. syndicated loan volume “as new money deals continue to be a driver of leveraged lending,” the report stated.
But those deals are coming at higher levels of leverage. The average junior debt to earnings ratio exceeded 7x in the quarter, above the 6.5x level in the second quarter. It is also well in excess of the 6x leverage that the federal interagency leveraged lending guidance establishes for large-bank deals.
(Federal enforcement of the leveraged lending guidance has been curtailed under the Trump administration. Comptroller of the Currency Joseph Otting announced in March 2018 the OCC would allow banks to exceed the 6x mark so long as institutions had enough capital and would not threaten the safety and soundness of the bank.)
The increases are mostly at the junior debt levels of deals, according to LPC. “The average junior debt to EBITDA level on large corporate LBO deals has increased to 1.75x in 3Q19, the highest since 4Q14's 1.87x level,” the report stated.
LBO deals involving printing company Multi-Color Corp, software firm Jaggaer, healthcare company Press Ganey and Nestle's Skin Care unit “are a few of the deals that have over 2x junior leverage levels in the structure,” the report stated.
