Friday, 11 December 2015

Top of the market? - part 3

Equity, high yield debt and corporate bond markets might be tumbling today but there is one asset class that is flirting with levels not seen since the great credit boom of the mid-noughties - leveraged loans.

I'm hearing that some of the recent private equity deals, such as KKR's £900 million takeover of Government Chemist LGC, are being done on some pretty racy debt/leveraged loan multiples.

Indeed, word is that some banks are offering to lend seven x EBITDA (a company's earnings before interest, tax, depreciation and amortisation) to the private equity bidders vying for material testing company Element, which is currently being sold by London-listed 3i.

The last time banks were willing to offer such high levels of debt to private equity bidders was in the run up to the financial crisis, when borrowing at between 8 to 9 x company EBITDA became the industry standard.

Still, I suspect we are still not quite anywhere near the euphoria of the credit boom of 2007. Back then, private equity firms, entrepreneurs and sovereign wealth funds were attempting (and sometimes pulling off) the most audacious takeover deals the London market has ever witnessed, such as KKR's £12 billion takeover of Alliance Boots. Of that £12 billion, around £9 billion was funded with debt/leveraged loans.

So, perhaps there is still some way to go before there is the successful completion of a similar deal but the leveraged loan market does appear to be heading in that direction...

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