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Equity Contribution Requirements Dropping in Large-Market Buyouts
According to Reuters Loan Pricing Corporation, which provides market information and analysis for the credit industry, the balance of power in large-market buyout negotiations has shifted. As economic conditions in the U.S. improve, we appear to have entered a stronger credit cycle, according to the RLPC. Add to that a shortage of availability in mergers and acquisitions, and sponsors of leveraged buyouts are pushing for more advantageous terms.
"The market is receptive so borrowers can drive things more in their direction," said a leveraged finance banker interviewed by Reuters.
While 40-percent equity contributions in mid-market deals are still the norm, the requirements in large-market deals are coming in between 20 and 35-percent of the deals’ value. As recently as 2010, sellers in buyout negotiations could comfortably demand that buyers put more skin in the game. At that time, it wasn’t uncommon to demand as much as 50 percent equity from potential buyers, along with covenants and other favorable terms.
Times have changed in three years. "As a rule of thumb,” said the banker, “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." Buyers are moving toward much more aggressive terms, such as higher leverage, lower margins and few or 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,” said another leveraged finance banker.
Part of the change, according to the RLPC, may also be due to cross-border deals in the European Union, which apparently already had lower equity contributions and fewer covenants than those in the U.S. And, as bond market yields increase, the loan market is struggling to keep customers from exiting that market in favor of refinancing via high-yield bonds.
Source: Reuters, “RLPC-Sponsors push for lower equity levels in leveraged buyouts,” Claire Ruckin, Sept.16, 2013
