Anyone knowledgeable about leveraged finance here? There are lots of undervalued assets out there and companies will still needs loans. Your views?
It’s like having a rain-out and asking if this is the end of baseball. Of course not.
Of course not…leverage is intrinsic in business
Of course it is, just like it was in the 20’s, the 70’s, the 80’s… it’s also the end of the era of greed, just like in the 20’s, the 70’s, the 80’s… (plus a whole bunch of eras I probably have forgotten or never even knew) “I swear, this time it IS different!” Funny how people were saying that on the way up (the end of risk, the ‘goldilocks’ era blah blah blah) and now how they’re saying it again on the way down…(the end of Wall Street, the end of credit blah blah blah…)
There’s no question that borrowing is much more expensive – you’re looking at senior debt with interest upwards of 8-9% and mezz debt upwards of 15% right now. Credit is very hard to come by right now, but there is still some available financing in the middle markets. What’ll eventually happen is that as interest rates come down to stimulate the general economy, more lenders will enter the market because they know that they can extend credit at lower rates and still make a killing…so like everything else, things come in cycles and credit will eventually be available again. Right now, we’ve seen some leveraged buyouts that are financed with nearly 50% debt/50% equity, but this is by no means the end of the LBO. Besides, as the original author noted, there are a lot of undervalued assets right now – and even though credit is expensive and the market is tight, multiples for companies that are being sold have come down materially, so PE investors are still keeping their eyes peeled for good deals, all factors considered.
numi glad to see that you are still optimistic in PE land. was consindering making the move there myself someday… is is true that senior is at 8% over there? won’t that represent something something like a 5-6% margin? i’m not in the us so am not too familiar - but over where i am, senior is nowhere that expensive…
Multiples have definitely come down.
myzegna Wrote: ------------------------------------------------------- > numi glad to see that you are still optimistic in > PE land. was consindering making the move there > myself someday… > is is true that senior is at 8% over there? won’t > that represent something something like a 5-6% > margin? i’m not in the us so am not too familiar - > but over where i am, senior is nowhere that > expensive… A lot of the major lenders see senior debt going to LIBOR + 500-550 bps, with a floor at around +325-350 bps. On top of that, the deal structures we’ve been seeing are usually something like 40% senior/20% mezz debt/40% equity. So yeah, the capital structure of LBO’s has definitely changed, and a lot of lenders have apparently left the market or are at least very cautious…but at least there are some deals getting done. I guess that’s why I still have my job, at least for now.
Numi, what were the capital structures of LBOs like before? Thats alot of equity. Another related question: How long does everyone think this trough will last for before credit markets pick up again… and this time will it be booming and excessive? There a bit too much government intervention and I’m not sure whether they are just saying this to calm the markets or whether they really are going to mess with all the banks and therefore the market.
Before what? I don’t think we’ve seen leveraged transactions greater than 70% debt/30% equity for at least the last year or so. Most of the major lenders expect credit to remain tight through at least the first half of next year. Not sure when the credit markets will pick up again. A lot depends what the governments and banking systems do in the interim, but I can definitely tell you that many PE firms are more focused on taking costs out of existing portfolio companies as their top priority right now, with deal-making being a secondary concern. I think PE firms are generally resigned to the fact that credit will remain tight for the foreseeable future, and are accordingly more concerned about just maintaining profitability in companies they already own.