Attractive pricing on a full range of leveraged finance deals is giving bankers the confidence to underwrite more transactions.
(Bloomberg) — Attractive pricing on a full range of leveraged finance deals is giving bankers the confidence to underwrite more transactions.
A $5.7 billion-equivalent loan that helped to fund the buyout of Worldpay Inc. and a financing for the private equity buyout of Syneos Health Inc. both saw pricing tighten twice during the deal processes — a sign of strong investor demand. The sale of debt backing the buyout of Brazilian restaurant chain Fogo de Chão Inc. also went well, with pricing tightening. Crucially, the deals span across junk ratings, offering bankers key data points.
The increase in demand has come as optimism grows over a soft landing for the US economy and as rate-hike campaigns by the Federal Reserve and the Bank of England have been paused. After sitting on the sidelines for much of the long, lean stretch of M&A financings over the past 18 months, investors have cash to spend.
“The recent spate of successfully executed LBOs should help be another positive catalyst for the M&A market,” said Chris Bonner, head of US leveraged finance capital markets at Goldman Sachs Group Inc. “Seeing a number of transactions across the entire ratings spectrum clear at attractive levels means we are seeing a much healthier market than we have seen in quite some time.”
The success of the deals — with Worldpay boosting the size of its offering and Syneos also upsizing the loans in its deal — will help bankers underwrite more transactions with the knowledge that investor appetite is back. It’s a big turnaround from earlier in the year when they were still focused on getting rid of the billions in hung debt on their balance sheets from commitments that turned sour in 2022.
“We are seeing strong investor demand across the board in the syndicated markets, which is giving banks confidence around underwriting new commitments,” said Yuriy Oren, Americas co-head of leveraged finance at UBS Group AG.
To be sure, a nascent revival of the M&A market could be dampened by further economic uncertainty or another shock like the banking-sector turmoil seen earlier this year. This week markets experienced another sell-off, with the 10-year Treasury yield surpassing 4.5% for the first time since 2007 as investors fret about how central banks are likely to keep rates higher for longer.
For now, however, leveraged finance bankers and investors remain optimistic, with the return of the $1.3 trillion market for collateralized loan obligations, which repackages leveraged loans into bonds of varying risk and size, also helping sentiment.
As new deals price tighter and demand for debt grows, more opportunistic deals are also emerging — including refinancings, repricings, add-ons, extensions and even dividend recaps, something typically only seen in the hottest of markets.
Read More: Junk Issuers Seize on Market Mood to Raise Cash While They Can
Nord Anglia Education on Thursday finished a repricing for two loan tranches with pricing at par — the first euro-denominated leveraged loan without an upfront discount since before Russia’s invasion of Ukraine. While pricing guidance on a €700 million ($745 million) loan for Cegid, which will be used to fund a dividend, also tightened on Thursday.
As confidence in underwriting buyouts comes back, competition with private credit lenders for deals will likely heat up. Banks have been reducing the pricing protection they demand when committing to new deals — also known as flex — with levels now returning toward historical norms of around 125 basis points, according to bankers, from over 200 basis points recently. That may enable them to beat private credit firms on pricing to fund more deals.
“Depth of order books and the breadth of the types of accounts we are seeing play across the loan and bond markets is telling a story that is quite different than was expected even a few months back,” Goldman’s Bonner said.
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