Issuers tapping public syndication for leveraged buyouts have turned to the high-yield bond market in recent months, with impressive levels of activity considering the current shortage of new money issuance.
High-yield bonds totaling USD 7.6bn have been issued to back LBOs in April and May, the third highest quarterly volume in the last decade even with a month of the quarter to go. Four buyouts make up the value: Capstone, MoneyGram International, Copeland and TIBCO Software.
In contrast, just USD 5.9bn made its way through the institutional loan market this quarter in aid of leveraged buyout facilities. Loan buyout volumes have historically exceeded bonds by an order of magnitude.
Buyout activity in the bond market is also slightly up versus 2022, sitting at USD 8.5bn for the first five months of the year. Meanwhile, overall new money bond activity totals USD 17bn so far in the second quarter, only slightly behind the average levels seen in 2013-2020.
The amount raised in the loan market in April and May also stemmed from four issuers. Blackstone represented two of the buyouts, with its acquisitions of Cvent and Emerson. In addition, Lovell Minnick Partners purchased Pathstone and CD&R bought Focus Financial. Other M&A financing accounted for under USD 2bn in May and stemmed from six deals.
Sky-high loan pricing make bond yields attractive
The state of the buyout market's disparity between the loan and bond asset classes is linked to the pricing on the respective facilities.
In isolation, bond pricing movement in recent quarters does not look to be an exciting catalyst for new money paper. Yields have remained roughly equal to levels seen in the preceding four quarters, with the average currently sitting at 8.4%. Similarly, yields in the secondary bond market have varied little since June 2022.
Compared to astronomical loan yields, however, the bond market looks positively enticing. The average yield on first-lien institutional facilities has exceeded 10% overall, rising to 11% for debt backing the LBO deals that have been signed this year.
Of course, the predominantly fixed nature of bond markets and the floating-rate nature of loan markets mean that coupons on the latter instruments will shrink in step with central bank target rates. Attempting to predict interest rate movements has been a fool’s game in the recent past and has resulted in many losses from asset managers - including the likes of multi-billion-dollar financial institutions.
