Cheapest loan rates fueling leveraged buyouts in US
businesstimes.com.sg
Business Times - 08 Feb 2011
(NEW YORK) Private-equity firms are raising loans in the US at the lowest costs in two-and-a-half years, foreshadowing a possible surge in bigger leveraged buyouts as the economic recovery gains strength.
'We believe LBO transactions requiring US$5 billion or more of financing can be executed on attractive terms; in fact, we're pretty sure it's higher,' Stephen Schwarzman, chief executive officer of New York-based Blackstone Group LP, said last Thursday. The co-founder of the world's biggest private-equity firm put the figure at as much as US$10 billion during a Jan 27 Bloomberg TV interview.
Interest rates on new loans have dropped for six straight months to 4.32 percentage points more than benchmarks, the lowest since August 2008, from their peak of about 5.83 per cent, according to Standard & Poor's Leveraged Commentary and Data. The decline represents annual interest savings of about US$15 million for every US$1 billion borrowed.
Takeovers increased more than fivefold to an average of US$17.6 billion a month last year after plummeting by 94 per cent to US$3.3 billion in the three months following Lehman Brothers Holdings Inc's September 2008 collapse, which froze credit markets.
Del Monte Foods Co, the fruit and pet products company KKR & Co is purchasing, and J Crew Group Inc, the clothing retailer TPG Capital and Leonard Green & Partners LP are buying, are taking advantage of rising investor demand to negotiate tighter spreads and looser terms on loans for acquisitions.
Companies raised US$8.3 billion of leveraged loans, rated below Baa3 by Moody's Investors Service and lower than BBB- by S&P, for buyouts last month, 25 per cent of the total and the most for takeovers in three years, S&P LCD said. The S&P/LSTA US Leveraged Loan 100 Index rose 0.14 US cent last week to 96.13 US cents last Friday, the highest since Nov 8, 2007.
'The sponsor community is clearly more comfortable that capital is available at attractive rates and terms, and their downside cost is mitigated,' said Thomas Cole, co-head of US leveraged finance at Citigroup Inc in New York.
Investors have been more willing to go into riskier assets, pushing down borrowing costs as the Federal Reserve keeps its target interest rate for overnight loans between banks in a range of zero to 0.25 per cent to spark the economy.
The US leveraged loan default rate declined to 2.8 per cent at the end of last year from 12 per cent in 2009, Moody's said in a Jan 7 report. JPMorgan forecasts the default rate to end this year at 2 per cent and climb to 3 per cent in 2012, analysts led by Peter Acciavatti in New York said in a report last Friday. Banks arranged or started marketing US$32.9 billion of leveraged loans in January, the most since October 2007, S&P LCD said.
Private-equity firms, which pool money from investors and raise debt to finance takeovers with the intention of selling the companies later for a profit, had US$544 billion in funds to use for acquisitions as of January, according to London-based researcher Preqin Ltd.
KKR, Vestar Capital Partners and Centerview Partners LP agreed to buy Del Monte in November in a transaction valued at US$5.3 billion, the biggest private-equity deal last year, Bloomberg data show. During the height of the buyout boom in October 2007, New York-based KKR and TPG of Fort Worth, Texas, completed their acquisition of TXU Corp, now called Energy Future Holdings Corp, for about US$45 billion, including debt.
Last month, Sara Lee Corp, the maker of Douwe Egberts coffee, couldn't agree to takeover offers from suitors including Brazilian meat processor JBS SA and a group including Apollo Global Management LLC, Bain Capital LLC and TPG.
The private-equity offer was about US$19 a share, valuing the company at about US$12.1 billion. JBS gave up efforts to raise equity financing for a higher bid after lining up more than US$9 billion in loans and bonds for a US$20 to US$21 per share offer, people familiar with the situation said at the time.
A strengthening credit market is allowing buyout firms to put up less of their own cash for acquisitions. Debt used to finance LBOs rose to 5.2 times earnings before interest, taxes, depreciation and amortisation by the end of last year from four times during 2009, according to S&P LCD. The average amount of leverage for buyouts of companies with Ebitda of more than US$50 million peaked at 6.2 times in 2007. - Bloomberg
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