Banner debt issuance is having second order effects across the market. A note from LCD, a S&P Global Market Intelligence offering, says that M&A-related leveraged loan issuance stood at a record $159 billion in the first half of the year. Let’s take a look at where we go from here.
New issuance in leveraged loans so far in 2021 has eclipsed the $154 billion through the same period in 2018, the previous record holder. And it comes alongside a resurgence in M&A-related high yield issuance: that market saw a record high $37.4 billion issued through 2Q21. The previous year’s slowdown in which M&A-related issuance only constituted 11% of debt market deal flow is over.
The implications abound. For limited partners, ballooning deal valuations and leverage levels used to finance them have prompted enhanced scrutiny of general partners. More than 5 turns of leverage is cause for raised eyebrows, Australian retirement fund Aware Super growth equity investment analyst Karen Nes told Mergers & Acquisitions last week. And a deal’s return drivers must be linked to revenue growth rather than merely anticipated multiple expansion.
That scrutiny is important. While LPs typically use the boilerplate term to indicate routine oversight of their investing partners, recent evidence shows the preference could have more bite. Limited partners are more likely to turn down general partners’ new funds than in the past, according to Coller Capital’s survey of global LPs. Just over 40 percent of respondents — surveyed from February to March — said they are less likely to invest in successor funds, chiefly due to performance concerns about individual GPs.
Likewise, general partners that already use lower leverage levels see creeping debt levels as an opportunity to differentiate their pitches to would-be acquisition targets. Dealmakers are coping with higher multiples by sourcing deals before they become competitive auctions, structuring deals with contingent payouts, and pitching founders on non-price advantages like partner networks.
And the party’s not likely to end soon. When asked about the role easy credit markets play in the ongoing M&A boom, EY global buy and integrate leader Brian Salsberg told a media roundtable last month that corporate refinancing could continue to gin the market.
“For sure the ability to borrow money at effectively negative interest rates or very low interest rates is driving this,” Salsberg answered. Companies can retire more expensive debt with newly raised proceeds serviced by a cheaper coupon, creating something of a virtuous cycle when M&A opportunities arise. “Normally with valuations rising, assets become too expensive to make the math work, but companies are willing to pay more for growth,” he said.