Banks are withdrawing checkbooks from leveraged buyouts as interest rates fall

(Bloomberg) — Investment banks, forced to make significant write-downs on risky merger and acquisition loans after a global rise in interest rates, are now returning to leveraged buyouts, one of the most profitable areas of finance.

Traditional lenders and private credit managers are telling private equity firms, known as sponsors, that they can provide more than $15 billion in debt in a single junk-rated deal. That’s about 50% more than last year, according to some market participants, when a number of loans were stuck on lenders’ balance sheets after central banks aggressively raised interest rates to tamp down inflation.

“The art of sponsor fundraising around the world has grown significantly over the last year,” said Dominic Ashcroft, director of leveraged finance for EMEA at Goldman Sachs Group Inc. “The loan and bond markets have grown in both Europe and the US in terms of what is achievable and possible. Add a bit of private credit to that and you’re getting closer to €13-15 billion.”

As the global economy cools, Wall Street’s LBO fee machine is starting to work again.

After a period in which appetite for loans fell following Russia’s invasion of Ukraine and a sharp increase in interest rates, banks are reversing losses on suspended debt. Deal-making is gaining momentum in the U.S. as the Federal Reserve’s first interest rate cut in four years boosts market confidence. Lower borrowing costs will allow private equity firms to increase the amount of debt they can service, making them more competitive when seeking to achieve their goals.

Some $2.4 trillion worth of mergers and acquisitions have already been announced this year, up 22% from the same period in 2023, according to data compiled by Bloomberg. Some of the high-profile buyouts on lenders’ radars include the consumer health division of French drugmaker Sanofi – with a deal potentially valuing the unit at around 15 billion euros ($16.6 billion) – and German generics maker Stada Arzneimittel AG, which was said to be valued at around 10 billion euros ($11 billion).

Investment bankers are touting comprehensive packages of senior loans, bonds and subordinated debt in exchange for the deals, according to people with knowledge of the matter, who asked not to be identified because the discussions are private. Competition is already weighing on margins, with prices for senior loans to well-rated, single-B-rated European companies running at about 350 basis points over the benchmark, about 100 basis points lower than last year, the people said.

Lenders can provide leverage “at levels of 7.0x and above, which would have been unthinkable 12 to 18 months ago,” said Roxana Mirica, head of European capital markets at private equity firm Apax Partners LLP. This brings them back to levels that were common before the suspended debt saga.

Pulling all the credit levers, the deal’s borrowing capacity could be more than $15 billion. According to some market participants, sponsors could raise about €2 billion in euro loans in Europe, double the amount from last year, and about €2 billion in senior euro bonds. Buyout firms would also gain access to about $5.5 billion in senior loans and $3.5 billion in U.S. bonds, and eventually about 2 billion pounds could be added as subordinated capital from private credit companies, the people said.

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According to Fergus Wheeler, a partner at law firm Latham & Watkins in London, major private lenders such as Goldman Sachs Asset Management and Blackstone Inc. are increasingly able to work with banks on financing arrangements.

“The sheer flexibility of their investment mandates allows them to provide sponsors and corporations with a wide range of smart capital solutions,” Wheeler said.

Still, there are reasons to be cautious.

While the US market has seen an increase in the number of leveraged buyout transactions in recent weeks, not every transaction has been successful. In August, a banking group led by Jefferies Financial Group Inc. lost about $15 million after it was forced to ease the terms of a leveraged loan for M2S Group Intermediate Holdings Inc. More recently, lenders led by Bank of America Corp. sold the leveraged loan for the GSM Outdoors acquisition at the largest market discount in 2024, both after the second reduction in the size of the financial package and the easing of conditions.

— With help from Paula Seligson.

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