Finance

Large leveraged buyouts return as private equity titans like Apollo and Stone Point look to put mountains of cash to work despite sky-high valuations

Summary List PlacementDebt-fuelled buyouts, like regular catnip for dealmakers, are not just back in vogue, they've returned in size. These big-ticket transactions generate substantial fees for bankers, while investors are champing at the bit to put money down on new borrowers that typically offer higher returns than those simply refinancing or repricing their existing debt. One of the biggest acquisitions in recent months - Stone Point Capital and Insight Partners' roughly $6 billion buyout of property technology company CoreLogic - is being supported with some $4.75 billion in leveraged loans, and it's in the market this week, according to sources familiar....

Michaels

Summary List Placement

Debt-fuelled buyouts, like regular catnip for dealmakers, are not just back in vogue, they’ve returned in size.

These big-ticket transactions generate substantial fees for bankers, while investors are champing at the bit to put money down on new borrowers that typically offer higher returns than those simply refinancing or repricing their existing debt.

One of the biggest acquisitions in recent months – Stone Point Capital and Insight Partners’ roughly $6 billion buyout of property technology company CoreLogic – is being supported with some $4.75 billion in leveraged loans, and it’s in the market this week, according to sources familiar. Apollo’s $5 billion buyout of arts and crafts retailer Michaels, meanwhile, is being funded with $1.8 billion in loans and $2.3 billion in high-yield bonds, and is scheduled to conclude by Thursday, sources said.

JP Morgan is leading the deal for CoreLogic, Credit Suisse is leading the loans for Michaels, and Barclays is leading the bond portion of the deal for the retailer, sources said.

The leveraged loan market, a regular playground for private equity shops’ hefty acquisitions, is expected to bear the brunt of this buyout volume over the high-yield bond market. Investors are turning their attention to floating-rate loan instruments from fixed-rate bonds as the former become a greater source for investor returns as markets bake in the possibility of future interest rate hikes.

Indeed, issuance in the leveraged loan market went above pre-Covid levels to $327 billion for the first quarter of 2021, up from roughly $268 billion a year earlier, according to Refinitiv data. Interestingly, $101 billion of volume in the last quarter was for new money opportunities, such as shareholder dividends or acquisitions, up from $95 billion during the first quarter of 2020.

“Investors are excited for transactions that allow them to participate in a new name or for a company doing a transformative acquisition,” said Alexandra Barth, a managing director and co-head of US leveraged capital markets at Deutsche Bank. “Private equity sponsors and investors are getting more comfortable with larger transaction sizes for leveraged buyouts.”

Take TPG Capital’s 30% investment in AT&T’s DirecTV. In February, the telecommunications provider said the investment from TPG valued the tie-up, dubbed New DirecTV, at $16.25 billion.

New DirecTV has locked down $6.2 billion in financing from banks, which will be distributed among investors in the capital markets at a later date.

AT&T is expected to pocket $7.8 billion from the partial sale, while TPG will inject $1.8 billion in cash to the venture. 

“With cheap credit still available, there is a good amount of private equity cash to be deployed,” said Stephen Philipson, the head of fixed income and capital markets at US Bank. “We could see the leveraged buyout market tested from a size standpoint.”

Sky-high valuations keep larger buyouts in check

While private equity is desperate to put money to work, these buyout giants are doing so during a time of soaring equity valuations.

This might prevent buyout firms from engaging in the heady acquisitions of 2018, such as Blackstone’s $20 billion buyout of data provider Refinitiv or KKR’s $10 billion purchase of Envision Healthcare.

In fact, $153 billion was raised in the loan market for leveraged buyouts in 2018, Refinitiv data showed. This dipped to $124 billion in loans in 2019, while last year, just $85 billion was raised for buyouts as M&A activity was impaled by the pandemic.

“I don’t think we have anywhere close to that, not due to lack of capacity, but we just don’t see deals that size given equity markets are at their peak,” said Sandeep Desai, the co-head of leveraged capital markets at Deutsche Bank. “To put that level of equity in requires a lot of conviction. That in my mind is holding those massive LBOs back.”

That’s not to say that this month’s calendar of acquisition-linked finance is anything to sneeze at. In addition to big-ticket deals for CoreLogic and Michaels, technology distributor Ingram Micro raised $2 billion in loans earlier this month to back its $7.2 billion buyout by Platinum Equity.

And with interest rates still at historic lows, capital markets bankers reckon now is as good a time as ever to load up on cheap debt to pay for acquisitions.

“On a historical basis, we’re still close to all-time tights on a yield and spread basis,” said Deutsche Bank’s Barth. “We are having conversations with issuers and investors about being in a rising rate environment. But the expectation is there is still going to be heightened activity as conditions are favorable for bonds and loans.”

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