On 31 October, lending for both large-cap and mid-market acquisitions in the US had already exceeded 2009 levels by wide margins, according to Standard & Poor’s: a clear indication that loan market has reopened for business.
“The [loan] market is absolutely on fire,” Charles Smith, head of corporate finance at advisory firm Loughlin Meghji & Company, tells PEI.
With two months left in 2010, S&P had recorded $24.8 billion worth of loans for large-cap deals, compared to $4.5 billion in 2009, and $2.5 billion for the mid-market, compared to $800 million last year. Neither the large-cap nor the mid-market figures, however, represented a return to 2008 levels, which stand at roughly $34 billion and $3 billion respectively and both were a far cry from 2007 totals.
Still, the return of lending has had a clear impact on private equity firms, many of which have recently been focusing on doing dividend and recapitalisation deals, Smith says, in an attempt to get money out of transactions executed in the past couple years.
“The markets being on fire has created an absolute euphoria of activity around trying to get exits through dividends or recaps, because they couldn’t do them through more traditional M&A sales,” he says. “What it also means – as it relates to the buyout business – is we are going to continue to see more and more resurgence of traditional buyout activity.”
As a result “loans and high-yield funds have really outperformed most other asset classes over the last 12 to 24 months,” Smith says.
Amid the thawing credit conditions, there has been a loosening of terms and a resurgence of covenant-lite loans.
“Unfortunately for a lot of middle-market private equity firms, a lot of the euphoria you’re seeing in the bond market and the loan market are for credits that are $50 million and above. It’s only now starting to trickle down into the middle-market,” Smith says. “I think in the middle market it’s moving that way, but it’s a little bit behind, and you’re going to start only seeing that now and extending into Q1 2011.”