Syndicated Bank Loans May Fuel Upturn in LBO Deals Expected in 2003

Syndicated bank loans may prime the pump for a widely predicted upturn in LBO transactions during 2003. Dealmakers have reported that banks have been extremely tight during the last few years, not only in actually releasing funds but in loan terms and covenants and in influencing deal structures to require greater equity contributions than sponsors historically have provided. However, an analysis of recent lending trends suggests that the banks may be more active in fueling leveraged acquisitions. Writing in the fourth quarter 2002 edition of Thomson Financial’s Capital Markets Quarterly Review, analyst Matt Hoehn found that the role of syndicated loans in buyouts “has varied significantly” over the last eight years, and in some periods the proportion of syndicated loan activity has run inversely with deal volume. Thus, syndicated loans, as a percentage of total LBO values compiled by Thomson Financial, ran in the 8% to 10% range from 1995 through 1998, then contracted to the 5% to 6% area as leveraged deal activity surged in 1999 and 2000. But the percentage swelled to 17.6% in 2001 when dealmaking suffered a 71% one-year plunge, only to recede to 8.2% – consistent with the mid- to late ’90s – in 2002 as deal flow turned around. The data would seem to suggest that banks, for their reluctance to move aggressively in leveraged lending, retain at least a bedrock level of interest for the right propositions. Hoehn points out that the Bain Capital, Texas Pacific Group, Goldman, Sachs “club” is financing the $1.5 billion purchase of Burger King from Diageo PLC exclusively through syndicated loans – split evenly between a revolver and a term loan. The interest rates are 300 basis points over LIBOR (London Interbank Offered Rate) on the revolver and 325 points on the term loan. Hoehn says that the relationship of syndicated loans to total deal volume, including the “increased reliance on loans during adverse buyout conditions,” can’t be traced to a single factor. Yet he finds an intriguing correlation between LBO volume and lending and the movements of LIBOR. The LIBOR level itself has dropped sharply from the 1999-2000 buyout surge while the loan rate spreads over LIBOR have increased. “The average LIBOR spreads on syndicated loans in general, and syndicated loans underwritten for LBOs, have increased during this same time period due to banks tightening their credit standards,” Hoehn says. “The crucial point is that LIBOR has decreased to a greater extent than the concurrent increases in spreads, thereby making syndicated loans an attractive financing option.” Hoehn thinks that syndicated lending will be important, suggesting that traditional lead banks will be active while other institutions will be more willing to take a piece of the action when the lead banks try to spread risk – much like the Burger King deal. “With LBO shops having sufficient cash on hand, and there being a large number of distressed companies due to an adverse economic climate, there is ample reason to believe that 2003 will be a big year for LBOs,” Hoehn wrote. Based on his analysis, he said, “there is evidence that syndicated loans may be a large part of these buyouts.” Copyright 2003 Thomson Media Inc. All Rights Reserved.