Reuters – Equity contributions on large leveraged buyouts are falling to levels not seen since the height of the buyout boom in 2007 as borrowers achieve more aggressive terms on deals from cash-rich investors eager to put money to work.
More positive macro-economic conditions throughout the course of 2013 and a shortage of M&A has allowed sponsors to drive more advantageous terms on their deals. A reduction in equity contributions is expected to intensify if positive conditions continue.
“At the moment we are in a stronger credit cycle so equity cheques are shrinking. It is natural to want to push equity percentages down,” a sponsor said.
A leveraged finance banker added: “The market is receptive so borrowers can drive things more in their direction.”
Equity contributions are coming in between 20-35 percent of deal value on recent large leveraged buyouts, materially lower than in 2010 when sponsors could expect to contribute as much as 50 percent of equity to a deal.
“As a rule of thumb, you would expect to see an equity contribution of around 30 percent currently but this will vary depending on the deal, how well the credit is known to investors and the sponsor behind it,” the leveraged finance banker said.
The move is part of a growing trend this year whereby sponsors are pushing for more aggressive terms on buyout deals including lower margins; higher leverage levels; and fewer, if not no covenants.
“This is part and parcel a trend for more aggressive terms on deals. Pricing is probably the easiest point to push and the first to erode but it all happens pretty much simultaneously, leveraged gets more choppy and equity contributions fall,” a second leveraged finance banker said. “There is not a robust new issue calendar for loans, so the deals out there are being taken out well, which means the next one can come more advantageously to the borrower.”
The move has also been driven by the US as European borrowers partake in cross-border deals, which have lower equity contributions as well as other aggressive terms such as covenant-lite packages. Bain Capital and Golden Gate Capital’s acquisition of global IT operations management software provider BMC Software earlier this year was backed with only 17 percent equity. The deal allocated in August.
The high-yield market has also driven equity contributions lower as the market is use to lower levels of equity. The loan market has had to compete with the high yield bond market in order to prevent companies exiting the loan market via a high yield bond refinancing.
The increased availability of high yield bonds as subordinated tranches on buyout financings has also promoted lower equity contributions as it is easier to push the equity contributions down when a deal is split between a senior and junior piece.
German metering firm Ista’s buyout in April saw sponsor CVC contribute around 30 percent equity while BC Partners’ acquisition of German publisher Springer Science+Business Media was backed with just 23 percent of equity.
Lower equity contributions are mainly being seen on the large buyout financings with mid-market deals still commanding at least around 40 percent equity. Investors want sponsors to have skin in the game and despite Springer Science only having 23 percent equity in the deal, this still equated to an equity cheque of around 725 million euros ($968.06 million). ($1 = 0.7489 euros) (Editing by Christopher Mangham)