Standard & Poor’s has warned that the increasing purchase price for leveraged buyouts, which rose to a record 9.4 times earnings before interest, tax, depreciation and amortisation in the three months before end November, has become an “extreme risk” in an aggressive market.
S&P says new debt issuance in the leveraged finance market, which includes senior, second lien and mezzanine loans and high yield bonds is also at record levels, rising to €180 billion in the 11 months to November, €20 billion more than last year.
An increase in the average purchase price was seen in August this year, when a consortium inclduing Apax Partners and Bain Capital paid received financing of 7.3 times earnings before interest, tax, depreciation and amortisation for Danish telecoms company TDC.
Paul Watters, head of loan and recovery ratings at Standard & Poor’s, said: “The underlying equity markets are steady to firm, helping to boost confidence to private equity firms that they are not overpaying for businesses.”
Watters said that liquidity remains strong on the private equity side and debt side and at the end of November there were 18 collateralised loan obligation funds, representing €16.5 billion of debt funding.
However, the industry must look ahead, he warned: “Although traditional bankers remain disciplined in their lending decisions, our view is that lenders need to look a lot more carefully at potential downside looking forward because that’s going to become increasingly important when some of those companies get into debt. It would be far better for the market to be more disciplined today and that would mean that we would have lower risks looking ahead for a hard landing.”
He added that the worst-case scenario would be that if that market continued to move on from this point and become more aggressive, in terms of the prices being paid for assets.