High Yield issuance in the past two years has been dominated by strategic transactions (M&A) rather than financial sponsor (private equity) driven leveraged buyouts (LBO). According to Barclays Capital the trend for 2010 continued into this year with M&A transactions being roughly double that of LBO in 2011.
|High yield issuance supporting M&A vs. LBO|
There are two key reasons for this trend:
1. As US corporations complete their post-crisis deleveraging and cost cutting while building up cash reserves, they are finding it difficult to grow organically. Strategic acquisitions (M&A) became a quick way of achieving growth. Some of the 2011 transactions have been quite large, for example Kinder Morgan‘s $21 billion purchase of El Paso and Express Scripts‘ $29 billion purchase of Medco Health Solutions.
2. The second reason has to do with the nature of debt covenant packages currently in place in a number of companies. Many firms have restrictions on liens that can be put on their assets, making it difficult for sponsors to use secured loans. A number of firms also have "restricted payment baskets" that do not allow cash flows from specific operations to be diverted to pay other debt. These restrictions make it harder for sponsors to create significant leverage needed for an LBO transaction. Without this additional leverage the return on equity (ROE) just does not look appealing for private equity firms who typically look for 25-30% ROE.
Going forward M&A activity in 2012 is expected to stay vibrant, driven among other things by low valuations.
TheStreet: Though much of this year's M&A movement came in the earlier part of the year, the U.S. still registered a healthy $841 billion in deals. That's a 24% gain from 2010 and the highest since pre-financial crisis levels in 2007, according to Dealogic.With valuations low, corporate cash balances high and tax changes likely to spur deal momentum, economists' M&A outlook for the coming year is largely positive.
With slow growth in the US, M&A will continue to be the most efficient way for many firms to achieve growth.
Deutsche Bank: "... M&A currently represents, we believe, the best opportunity for growth in a slow organic growth macroeconomic environment in the industrialized economies."