Senior Debt: Strong, Steady, Bright
Today’s debt markets are healthier than they have been in a long while. Growth prospects are also stronger than they have been in some time. Combined, they’re proving to create a steady environment for middle markets.
Global loan volume (middle-market and large capitalization companies) contracted 17% in 2012 to $3.1 trillion. Despite the contraction, it was still the second-highest total issuance since 2007. The primary reason for the decline in 2012 versus 2011 was that many issuers rushed to lock in favorable deals with rock-bottom interest rates and five-year tenors in 2011, leaving light refinancing activity for 2012.
Middle-market activity remained strong, however, in 2012 as favorable credit trends that began in 2009 for borrowers have largely continued through 2012. Total middle-market issuance, as well as new issuance, was up in 2012. Lending activity in the latter half of 2012 was primarily driven by improving technicals and a recovered banking system. In addition, 4Q 2012 was up versus the prior year and versus 3Q 2012, signaling a continuation of strong lending conditions.
New Money Issuance
A high volume of dividend recapitalizations and cash-out refinancings closed in the fourth quarter of 2012, largely inspired by U.S. tax code changes. Financial sponsors completed dividend transactions on seasoned investments. Owner-operators took cash out of their private company investments while interest rates were low and lending conditions were strong. In addition, LBO activity remained strong in 2012, with a high number of transactions closing in the fourth quarter as owners looked to monetize their stakes prior to pending U.S. tax code changes.
Rates, spreads, and leverage levels are at attractive levels for issuers, and the environment to support these levels is expected to remain in 2013. Rates for senior equipment loans ranged from 3.5% to 4.9%, working capital loans from 3.0% to 5.1%, and cash flow loans from 5.5% to 6.5%, based on loan size ($100 million to $5 million, respectively).1
Senior-debt-to-EBITDA ratios average 1.5x for companies with $1 million of EBITDA to 3.7x for companies with $100 million of EBITDA during the measurement period. Levels vary depending on sector and size, as shown in the table below.
Near Ideal Conditions
The lending environment has rebounded since the recession, and issuers are achieving very attractive pricing and terms. Opportunities to take advantage of these conditions open and close like windows (i.e., the window was closed for most of 2008 through 2010). Therefore, it is prudent that companies review their current opportunities and options today.
It’s also prudent to consider the assistance of skilled corporate finance advisors. Not only can the right advisors identify and secure the best loan package, but they can also assess the appropriate amount of debt a company can support, along with devising optimal use of proceed strategies.
2 Thomson Reuters LPC, March 2013
3 Includes only new financings, such as M&A, LBO, dividend recapitalization, and incremental fund-raising