* High-yield supply could dip 10% without M&A pick-up
* Refinancings to slow as rates rise, maturities pushed out
* Booming IPO market could also cap bond supply
By Natalie Harrison
NEW YORK, Dec 6 (IFR) - Leveraged finance bankers are
heading into 2014 with the same old nagging doubts about whether
M&A will finally pick up, but this time round there is an even
greater desire for a resurgence as refinancing opportunities
US high-yield volume is running at USD331bn so far this
year, close to last year's record high of USD336bn, according to
Thomson Reuters data, with more than half of that driven by
companies issuing new bonds at historically low yields to pay
down more expensive debt.
But with interest rates on the rise, the incentive for
companies to refinance is becoming less obvious, while the
urgency to do so has also diminished as a vast swathe of debt
maturities have been pushed out to 2017, according to Moody's.
To maintain the same kind of momentum in the market and to
keep fees flying in, M&A and leveraged buyout activity has to
make a comeback.
"M&A is always the most interesting thing to talk about. It
shows how companies and investors are looking at the world, and
it's how banks make money," said one senior leveraged finance
But acquisition financing has accounted for just 22%-24% of
high-yield supply over the last three years, according to
Goldman Sachs data.
"The question is how much of the decline in refinancings is
offset by increases in M&A driven financings, both
corporate-to-corporate deals and leveraged buyouts," said Marc
Warm, head of US high-yield capital markets at Credit Suisse.
A number of factors may hinder a revival, including the
rally in equities. Buoyant financial markets may be good for
investment bank fees overall, but if sponsors sway towards IPOs
rather than sales, then high-yield bond supply may slow until
that capital gets recycled in new deals.
Rising rates may also make leveraged loans a more attractive
substitute for high-yield bonds, which have the additional
caveats of punitive call costs for financial sponsors.
One factor buoying hopes of an LBO revival, though, is the
amount of cash stashed in private equity hands.
Sixty-seven US-focused buyout funds have raised USD67.3bn
this year, according to private equity data group Preqin,
marking a 40% increase on last year and the highest total since
"There is a tremendous amount of dry powder at the sponsors
which should lead to increased buyout activity, but the strength
of the IPO market and valuation discipline amongst the sponsors
has resulted in less LBO volume than we would otherwise expect,"
Lawyers are certainly busy, particularly on possible
mid-sized leveraged buyouts.
"Volume has picked up, with several auctions under way where
we have been contacted in relation to the financing," said
Robert Treuhold, a capital markets partner at Shearman &
The retail sector could shape up to be reasonably active,
with private equity firm Sycamore looking to broaden its reach
following its purchase of Hot Topic and Torrid.
It is advanced talks to acquire the off-price chain store
K&G of Men's Wearhouse Inc as well as Jones Group Inc.
"The pace of discussions that we are having has picked up,
and there are a numbers of financial sponsors that are thinking
about doing something," said one senior leveraged finance
THE BIG GUNS
What everyone really wants to see, however, are the jumbo
LBOs that require USD10-billion plus debt packages, like the
kind seen for Dell this year.
There are some big bond deals heading the market's way in
January, specifically to fund Community Health's
USD3.9bn acquisition of Health Management Associates.
But other than a potential buyout of Time Warner Cable
and possibly Vodafone, the cupboard for those
types of deals looks fairly bare.
AT&T has been scouting for targets, with Vodafone seen as
the most attractive once its deal to sell out of Verizon
is completed in the new year.
And speculation has been building for weeks that Charter
Communications will bid for TWC, while other suitors
including Comcast and Cox have also been thrown into the mix.
Some bankers say that the debt financing would likely exceed
the USD13.75bn debt that backed Dell. There's certainly no
problem raising that amount of debt as Dell, and others, have
Aside from big corporate deals, however, there remains the
same problem of raising equity for large buyouts as financial
sponsors shy away from club deals.
"With large deals, it's the equity that is the problem, it's
never the debt," said the banker.
Another leveraged finance banker said that activity was
likely to be driven by strategic acquisitions between
corporates, than jumbo LBOs.
One thing is certain: terms could get aggressive as banks
circle fewer deals.
Currently it's normal to see six or seven banks competing
for each LBO. And with less product floating around, investors
may be tempted to buy riskier, more leveraged debt.
Leverage has generally been in the five to six times
multiple range this year.
"Leverage has not gone to crazy levels, and for now there
definitely seems to be a cap on how far people will push
things," said the first banker.