Debt issuance for M&A and leveraged buyouts (LBOs) accelerated through the first half of 2021 reflecting the increased activity combined with dealmakers capitalizing on borrower-friendly loan and high yield bond markets to finance their transactions.
High yield bond and leveraged loan issuance for buyouts and M&A deals in all of North America and Western and Southern Europe climbed to US$319.5 billion in the first half of 2021, a 64% year-on-year increase from the US$194.6 billion recorded in H1 2020. Issuance in Q2 2021—totaling US$187.34 billion—represents the highest quarterly total for these combined regions on Debtwire Par record going back to 2015.
The rise in M&A and buyout financing figures mirrors the surge in deal activity witnessed in the first six months of the year, as companies and private equity (PE) firms pursued deal opportunities. This upward trajectory is expected to carry on through the second half of the year as economies continue to open up and COVID-19 vaccine rollouts continue in the US and Europe.
In the US alone, M&A value has increased more than three-fold year-on-year, from US$299.2 billion in H1 2020 to US$1.3 trillion in H1 2021. The first two quarters of 2021 are the highest on record for US M&A values since 2006. Western European M&A values, meanwhile, have more than doubled year-on-year, from US$271.5 billion in H1 2020 to US$583 billion in H1 2021.
Focus on yield drives lender appetite
Lender appetite to fund the rebound in M&A and LBO activity has been underpinned by demand for yield against a backdrop of prolonged low interest rates and abundant liquidity.
The European Central Bank has maintained an accommodating monetary policy and held its benchmark refinancing rate at 0%, while the US Federal Reserve continues to hold its benchmark interest rate at close to zero despite signs of rising inflation. Although inflation is on the radar for borrowers and lenders, the fact that central banks have kept rates at historic lows, coupled with lender focus on maintaining deployment targets, indicates that loan and bond markets for M&A and LBOs will remain active through the rest of 2021, if not into next year.
PE firms and companies have benefitted from these favorable dynamics and have accessed the market to finance various acquisitions, in particular big-ticket transactions, including:
- A PE consortium including Blackstone, Hellman & Friedman and Carlyle, as well as sovereign wealth funds Abu Dhabi Investment Authority and Singapore’s GIC, backed one of the world's largest leveraged buyouts, valuing medical supply company Medline at more than US$30 billion. Financing worth US$7.8 billion of both senior secured (US$3.8 billion) and senior unsecured (US$4 billion) bridge loans underpinned the package.
- Platinum Equity secured a US$4 billion bond-and-loan acquisition financing package to fund its US$7.2 billion carve-out of Ingram Micro, a technology distributor and logistics business, from parent company HNA Group.
- Thoma Bravo raised a US$4 billion loan to fund its US$10.2 billion take-private of rental housing software group RealPage.
- Consumer retail group The Michaels Companies raised a US$2.15 billion high yield bond as part of the financing arrangements for its US$5 billion take-private by Apollo.
- At Home Group, another consumer retailer, landed a US$800 million high yield bond to finance a US$2.43 billion take-private transaction backed by Hellman & Friedman.
Market opens to more sectors
The financing secured by the likes of The Michaels Companies and At Home Group, in industries directly affected by COVID-19 lockdowns, reflects just how much the market has opened up for issuers across a wider range of sectors.
Lenders initially focused on COVID-19-resilient sectors such as technology and healthcare in the immediate aftermath of the pandemic. While these sectors continue to account for significant activity, issuance in sectors hit particularly hard by the pandemic—from consumer retail to leisure—has revived throughout 2021.
In the leisure sector, for example, high yield bond and leveraged loan issuance for LBOs and M&A deals in the US and Western and Southern Europe increased more than seven-fold, from less than US$1 billion in Q1 2021 to US$7.8 billion in Q2 2021.
Consumer-related issuance for M&A and LBOs has more than doubled year-on-year from US$15.2 billion in H1 2020 to US$39 billion in H1 2021.
Improvements in secondary market pricing in these industries has been a big driver of the rebound in new money deals. In the US, for example, there have been material upswings in secondary loan markets in transportation, entertainment and retail, which have all outperformed the overall secondary loan market.
The return of issuers from a broader spread of sectors has offered lenders a deeper pipeline of credits to back, as well as opportunities to secure higher pricing. As a wider pool of borrowers returned to the market to fund deals, average first lien institutional loan pricing on US LBOs increased to a margin of 4% in Q2 2021, up from 3.72% in Q1 2021. LIBOR floors and original issue discounts also moved in favor of lenders.
Higher priced credits have been well-received by lenders focused on yield, which is expected to remain a priority.
After concentrating on protection against downside risk through the pandemic, including attempting to limit super-senior debt and unrestricted subsidiary flexibility in debt documentation, lender focus has returned to securing the best possible pricing. Lenders continue to try to limit unrestricted subsidiary and super-senior debt, but in a competitive supply environment with a focus on yield and economic returns they have been willing to agree to more aggressive terms being driven by the borrowers, in particular for credits that are in high demand or where attractive pricing is on offer.
Lenders’ priorities in this competitive market are to ensure they are receiving an allocation in syndication, that the pricing of the debt is satisfactory and that the terms of the debt reflect then current market terms.
If lenders are confident that the terms and pricing on the deals they back are in line with what the market is offering, they continue to be willing to take a pragmatic position and fund deals on competitive, borrower-friendly terms.