Private equity firms have loaded more debt onto their acquisition targets than ever before, surpassing their pre-pandemic record — and even the glory days of 2007 — thanks to the availability of cheap credit and the billions of dollars they have amassed to pursue new deals.
Last year, companies backed by private equity firms took on debt equal to an average of six times earnings, more than the record set in 2019 or in any of the past 20 years, according to data from S&P Global Market Intelligence’s LCD.
The wave of deals helped propel issuance of junk-rated loans for M&A to a record $331 billion last year, LCD data show, with $147 billion of that coming from companies rated six levels below investment grade by at least one of the three main credit-grading firms — the most ever.
Granted, the buyouts of recent years have generally been smaller than the blockbuster deals inked in the years before the global financial crisis, headlined by the record $48 billion buyout of Texas power giant Energy Future Holdings Corp. in 2007. That deal loaded the company with so much debt that it filed for bankruptcy less than seven years later.
While rising interest rates may put a damper on acquisitions, private equity firms still have around $960 billion of cash to spend on deals, and bankers expect debt sales to stay strong over the next several months.
Overall, companies that issued leveraged loans to finance acquisitions in 2021 had debt equal to 5.6 times a measure of their earnings, matching a record the market first set in 2018. That was higher that the 5.4 times recorded in 2020, when lower risk appetite among debt investors made borrowers more cautious.
For acquisitions where private equity sponsors weren’t involved, debt loads in 2021 were a more modest 4.4 times earnings before interest, taxes, depreciation and amortization, or Ebitda, according to LCD.