(Reuters) – Private equity firms are writing bigger equity checks to finance new buyouts as leveraged lending guidelines issued by U.S. regulators curb the amount of debt that banks are willing or able to lend.
Permira and Canada Pension Plan Investment Board (CPPIB) provided an equity check of around 50 percent to finance the US$5.3 billion buyout of business software maker Informatica, which shows that private equity firms are changing the way they finance buyouts to suit more sober times.
“That is really high. That is not what we are seeing normally right now although equity checks have been going higher,” an industry source said.
Banks are also providing US$2.625 billion of long-term debt to finance Informatica’s sale, which is the biggest U.S. buyout of the year.
Permira and CPPIB declined to comment.
Private equity firms are using less leverage and bank debt to finance new buyouts and are putting in more equity or equity-like products, more conservative covenant packages and more robust deleveraging and repayment plans.
“We have not seen deals not get done because of the guidelines, but we have seen deals restructured or modified,” said Joshua Thompson, a partner at Shearman & Sterling LLP.
Three other U.S. buyouts financed this year have had private equity checks of at least 50 percent to allow private equity firms to continue to compete with cash-rich corporate buyers amid high company valuations.
Madison Dearborn‘s buyout of infusion therapy provider Walgreens Infusion Services from Walgreen Co had the biggest equity check of 52.1 percent. The purchase price was undisclosed, but the deal was financed with a US$415 million term loan and an US$80 million revolving credit.
The buyouts of investment advisory services provider American Beacon Advisors and moving and storage company PODS Inc also had equity checks of at least 50 percent, according to LPC data.
Average equity checks on buyouts of more than US$500 million were 38.5 percent in the first quarter of 2015, up from an average of 34.8 percent in 2014 and 31.9 percent in 2013, according to Thomson Reuters LPC data.
The first quarter numbers are the highest since 2011, when average equity checks were 39.5 percent. Equity checks dipped as low as 29.4 percent in 2005 before the financial crisis.
Only five buyouts had large equity checks of at least 50 percent in 2014 and all arrived in the second half of the year, after regulators started enforcing the leveraged lending guidelines more vigorously.
Federal regulators’ guidelines state that deals with leverage of more than six times must be able to pay down half of senior debt or all of total debt within five to seven years.
Bigger equity cheques may have been what regulators were trying to achieve when they started cracking down on the amount of leverage and debt that banks can underwrite, sources said.
“I think that a conscious by-product of the regulators’ approach is to put additional pressure on the private equity firms and to get them to put up more equity, which is, of course, at the bottom of the capital structure,” Joshua Thompson said.
While many loan commitment letters still include a minimum acceptable level of equity of 20-25 percent, the amount of equity being used far exceeds that.
“We think (the leveraged lending guidelines) have been a highly effective in terms of the regulators’ stated policy goals and well-communicated policy throughout the leveraged lending community both to the banks and to the borrowers,” Thompson said.
“The private equity firms are well aware of the guidelines and continue to moderate and modify their expectations,” he added.
By Jonathan Schwarzberg
(Reporting by Tessa Walsh)
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