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LPC: US private equity lending hits record levels

NEW YORK, Dec 1 (Reuters) - Lending to US private equity-owned companies hit a record high of US$588bn at the end of November, despite regulators’ attempts to cool the market and a lack of jumbo deals, and is expected to climb further before the end of the year.

Sponsor-backed lending is already 11% higher than the previous annual record of US$530.2bn set in 2013, according to Thomson Reuters LPC data.

Another US$117.1bn of loans is in the pipeline, including financing for corporate financial adviser Duff & Phelps’ LBO and a US$1.6bn refinancing for yearbook and class ring maker Varsity Brands, which are both expected to close before year end.

Most of 2017’s volume has come from refinancing and repricing activity, which at US$477.3bn of business, made up 81% of the total. Buyout loans have hit US$111.3bn, the third-largest amount on record, and the biggest year since 2007 when leveraged buyout lending tallied US$209.9bn.

The surge in sponsor-driven lending comes despite the imposition of Leveraged Lending Guidelines by Federal regulators in 2013 that were designed to reduce systemic risk by curbing highly leveraged lending.

Although deals with leverage above 6.0 times receive extra scrutiny, regulators still allow banks to underwrite highly-leveraged loans if they can show that the debt can be repaid quickly.

Repricing activity has come in waves this year as strong investor demand for loans has boosted secondary prices, allowing issuers to return to the market to cut primary pricing to hold on to the loans.

“It’s really been relentless,” said a collateralized loan obligation (CLO) investor this week. “And another round is starting up again.”

In mid-November, Apollo-backed timeshare operator Diamond Resorts repriced a US$693m term loan to 450bp over Libor from 600bp over Libor.

On the refinancing side, Charlesbank Capital Partners-backed Varsity Brands is currently arranging a US$1.125bn first-lien loan and a US$500m second-lien loan to refinance existing debt.


Buyout activity has been boosted by activity in the middle market space. Volume has risen to US$24bn this year, the highest figure since 2007 when middle market buyout volume totaled almost US$30bn.

Risk services provider CenseoHealth is the latest middle market issuer looking to finance a buyout. The company on Wednesday launched a US$260m term loan and a US$35m revolving credit facility to support its acquisition by private equity sponsor New Mountain Capital.

Despite the strong numbers, bankers and investors have bemoaned the lack of big buyouts in 2017, as high equity valuations continue to put many acquisitions out of reach.

The largest buyout loan of the year backed office supply provider Staples Inc’s US$6.8bn buyout by private equity firm Sycamore Partners. The financing includes a US$2.9bn term loan and a US$1.25bn asset-based lending facility along with US$1bn of senior notes. The deal was led by UBS.

A US$1.75bn loan backing Duff & Phelps’ buyout by private equity firm Permira Funds is currently in syndication. UBS is also leading this transaction, which includes a US$1.02bn term loan and a US$100m revolving credit facility and is expected to price on December 5. (Reporting by Jonathan Schwarzberg; Editing by Tessa Walsh and Jon Methven)