What are current terms people are seeing in the market for senior and sub debt associated with buyouts? Specifically for companies in the lower middle market, maybe $10 to $20 million in EBITDA.
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depends who's doing the arranging....
if its a standard bank/sub debt structure: senior L (3-4% floor) + 6-700 sub @ 15%-17% with warrants (definetly at those ebitda sizes)
if a fund is structuring it as a unitranche: Senior piece with mezz pricing: 14.5% -15% with an equity co-investment and moderate cash sweeps... a floating rate isnt unrealistic either with a 4% LIBOR floor and a 11-1150bp spread above that. Non call 2 with 106 at 3, 100 thereafter...
Ha I have a spreadsheet in my office outlining the various debt instruments for all of our portfolio companies from 2005-2007 and I see a CMBS $1B securitized facility at L + 250 bps can we go back to those days
thanks...what about other terms such as leverage and am period (5 vs 7 years)? Also, do the sr/sub lenders take into consideration the revolver when determining leverage...for example say a 10 ebitda company has a 20 million revolver (not necessarily drawn), and sr/sub are willing to do 3x, does that mean the will do 30 million on top of the 20 million revolver or only 10 million
The tenor has remained the same, senior 5-6, mezz 7-8 and a mezz like senior at 6-7...
Standard senior TLa sees aggresive amortization ie 10% yr1, 12.5% yr2 etc., tlb may see something more modest around 3% per year...
You only count the revolver if it is drawn... These days you'll also see it as the true first lien with term loans under some type of intercreditor agreement subordinating it to the revolver...
Leverage for a standard senior/sub comes in at 4.0x max with 2.5x senior 1.5x sub...
If it's a unitranche, you'll see a max of 3.5x... These are actually easier to attain these days that the classic structure...
MezzCat, What is the target return for the Mezz? 20% including warrants? What is the split on the cash pay interest vs. PIK interest?
I haven't even seen any TLB's being offered and you can forget about second lien. If creditors are going to take subordination behind the senior (given that there is no collatoral base to support them) in an environment where there's real bankruptcy risk, they might as well suck it up and fully subordinate themselves and get compensated for it.
As for mezz returns, you're likely looking at a 14-16% all-in rate. No equity sponsor in their right mind would give up 20% to a debt holder, they might as well put in more equity.
3x snr, 4x total. Much less for auto, chemicals. Pricing on larger deals L+400-500, around L+1100 for the Mezz, no 2nd lien. At least 50% TLA, no TLC. TLA 5-6yrs. +1 yr or same for TLB. Pricing on smaller regional deals in France, Germany, Italy is lesser - the problem here is that the few banks which are active in the market are all chasing the same (few) deals - ending up at L+300-350 for the snr!!! LIBOR floors and unitranches are rare
... I should probably change the "LIBOR floors and unitranches are rare" to "deals are rare"
I'd say mezz targets return all-in contractual at 15%-17% at the sub level with another 1-2% IRR of warrants on a conservative case for a blended return of close to 20%... PIK of 2-4% isnt unlikely especially with cashflow constraints..
Should that same fund do a senior piece, 14-15% all-in contractual with an actual co-investment in the equity... this target roughly 17-18% but has security which is good... PIK will be 2-3% on this, for the US at least... this may increase should leverage rise above certain levels, within covenant limits, making the return even more attractive
Secondary debt purchases have to exceed 20% IRRs with over 2.0x cash-on-cash returns...
As for Monkey1's comment, deals are not "rare" just not as popular as you're used to seeing. I can sure tell you debt funds are seeing most of everything in this market... If you want a deal done, you go to a fund before you tap a bank... And with LIBOR at LIBOR floor of at least 3%... even the last $2+bn buyouts had LIBOR floors...
If you want a deal done the European market, you don't go to a fund for the senior debt because the funds who have money are picking the assets they want in the secondary market, esp as even good solid credits are still trading at pretty low levels. (note how TDC, which after being upgraded by Moodys and releasing strong 2008 results this week, is still trading in the 90s - the last run i saw was 91.5-93.5 TLA - inspite of leverage being below 3x thru the senior). The funds all want comparable fees/OIDs for new deals in primary to match up to secondary levels, which really isn't happening here unless the sponsor is willing to cough up for it or you call the market wrong and end up with a seriously long position (that is if anyone is doing big underwrites in the first place!) and credit committee goes clear it now.... So the banks are clubbing up to get deals done in primary (again European view)... you do need a fund for the Mezz but the ones we are working with are pretty reasonable c.11% + warrants/ equity co-investments... yeah, agree on that rare point...just not used to seeing this low level... grim
As far as TDC goes, maybe that's the way the market is reacting to the aggressive behavior of the borrowers over the last few months. The company used some loophole in the credit documentation to buy back €500m of senior debt in oct '07, followed by €200m in febr '08. (out of a total debt package of €5.5bn approx.) I heard this was done with the company's cash without any prior warning to the lenders. The debt was acquired by the acquisition SPV, effectively leading to an extinction of said debt. Interesting case study though.
interesting to see what current rates are - haven't had to price anything with Lev Fin in a few weeks.
these are the threads the site needs more of
Agreed 2007Analyst, very interesting thread. But here is the million dollar question: Who is doing the lending???
~~~~~~~~~~~ CompBanker
UK banks are practically shut. The smaller French and German banks are still at it (not all though). Italy LevFin is closed to you unless you're an Italian working in an Italian bank doing an Italian buyout (although N&W Vending did get done over H2'08 & Q1'09 with a big bank syndicate but the deal was at the large end for the current market). CEE still humming but a few deals got pulled recently when sellers and buyers diagreed on valuations... Nordic is fairly dead and is likely to be like Italy when wakes up.
In contrast to Monkey1's view, in the US market funds can truly pick up assets on a secondary basis but what you tend to ask yourself whenndoing so is, do I want a primary deal I know to the core with leverage of 3.5x and senior security or a senior piece at L+250 trading at 60 yielding an IRR of 10% on a 4 year holding period... Which might I add is probably still sitting at 4.5x leverage... Or a sub debt piece trading at 40 sitting at 6.0x leverage... For us the answer from a risk perspective is clear...
As for European markets, funds are only buying portfolios with 10-15 assets at unbelievable discounts but not single debt pieces but unfortunately, the European markets on a primary basis are truly dead...
European market in intensive care I'd say... 3-4 deals closed and funded in Jan (which is pretty bad compared to the heydays) - but there are lesser banks active so if you're active, there's a good chance you'll get crack it (or should if you have a good PE relationships anyway..) deals right at the small end of what we used to do... but something's better than nothing... :)
just curious. which group do you guys work in? LevFin group, Loan Capital Markets Group, etc.?
Debt Capital Markets here
I do buyside leveraged finance, ie I work for a subordinated debt fund targeting LBOs only, works much in the same way PE funds do.
can anybody explain the split between cash and PIK interest and how they are taken into account on a LBO model? Also, when a company says it elected to pay interest on PIK toggle notes with additional securities instead of cash, does that mean the company decided to accrue interest instead of paying out cash? If that's the case, why is it saying they are doing it with additional "securities"?
Well if i give you $100, you pay me 13% cash per year ie $13 and 2% is capitalized eg my debt on your books is now 102. Next year you now pay me 13% of 102 and then 2.04 capitalized ie my outstanding on you Balance sheet is now 104.2.. and it goes on....
Assume: 13% PIK Toggle PIK toggle is this: assume you have no cashflow to pay me my 13% this year, you elect to toggle it on PIK and instead of sending me a cash check, you just capitalize it and add it to my debt outstanding...
they say they're giving you securities because they've just issued u more debt that what you put in...
Private Equity Associate..
This is an awesome thread. I've been out of the biz since mid-2007 and this is a great way to get a hand-up on the current status of the market's appetite for leveraged debt. I remember the days of L+250 and PIKs galore. Anyways, continue on....
how about pik notes... screw the toggle, ppl were so hungry to throw money at deals they wouldnt even take cash as interest... o the humanity
Mezz priced, structured and sold as 2nd lien...
i prefer mezz priced, structured as senior with minimal cash sweep... best of all worlds..
can someone answer my question on how a revolver comes into play? If a company currently has a $30 million revolver on $15 million ebidta, and utilizes the revolver for short term inventory purchases, how will the sr/sub guys view the revolver. Will they lend 3x on top of the revolver or will they factor the revolver balance into their leverage and only do 1x?
The simple answer is a revolver is only counted for leverage purposes when it is drawn down. So at the closing of a transaction, a $100bn revolver is irrelevant until it is drawn. Should it be drawn at closing due to an incapacity to fully secure necessary financing, then you count it.
A $30m revolver does not mean it can draw on that at any given time as it is computed off a borrowing base which in itself is calculated off of the Short Term asset's appraisal value (size is never computed off of EBITDA like other debt facilities, only if drawn for leverage multiple purposes)
As a sub lender there are clearly certain things you analyze whether or not the revolver is drawn at closing as these going forwrad can create risk/benefits: - Evergreen vs. Revolver with clean-up provisions - Swingline provisions - Borrowing base calculations
Really if a transaction had 3x leverage that excluding the revolver capacity as a model rarely draws on a revolver only for free cash flow short falls. So no matter the size of the revolver, leverage is computed off of the proposed debt structure at closing and should that include a drawndown revolver, so be it, if not even better.
Hope that explains it briefly..
It's been a while since we didn't have so interesting a topic on the PE board.
I would add, as far as RCFs are concerned, that sub lenders pay particular attention to them. When a revolver is drawn, the company effectively takes on additional senior debt to which sub lenders are subordinated, effectively increasing their risk.
I was surprised by the mention of unitranches from several users. Is it something you've seen on recent transactions? US or Europe? Any warrants attached? Fixed or floating rate?
Many thanks
The unitranches are becoming more prevalent in the US with the current commitment issues and bank incompetencies... On larger sized transactions with Ebitda in excess of $20m, I would have to say it is difficult to negotiate warrants on top of the senior security and high pricing... You will have equity co-investment rights though...
As for floating v fixed, it is still operating under sub pricing structures but with the current inflation risk in the next 2-4 years, high libor floors are becoming more popular, 4%+ on the floors. It is starting to look like European pricing structures with an ever increasing proportion of PIK to cash rate...
Yes, the unitraunche structures are being originated out of the bigger hedge funds and credit funds (the only people really lending right now).
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