The Verit View – January 2013
Verit Advisors’ view is that attractive debt capital markets including strong access to capital for middle market businesses will build upon 2012’s momentum and continue into 2013. Companies should continue to actively review their current and long-term capital strategy and debt capital alternatives given the robust credit markets and availability of borrower-friendly terms.
Debt Capital Markets Update
In the third quarter, the leveraged loan market staged a robust rally with loan volume increasing to $117 billion, representing the biggest third-quarter total on record. Loan volume is expected to reach $426 billion in 2012, a 13.3% increase over 2011’s $376 billion. Third quarter activity was primarily driven by improving technicals and a recovered banking system that is actively providing capital to the benefit of creditors, primarily for event-driven financings. New leveraged loan issuance in Q3 2012 shifted toward M&A and LBO related financings, rather than refinancing, as many borrowers had already opportunistically refinanced. Dividend recaps continued to represent a significant level of loan volume as private equity sponsors pursued dividends on seasoned investments in advance of potentially rising tax rates.
The borrower-friendly credit trends that began in 2009 continued to benefit borrowers in Q3 2012. Debt/EBITDA leveraged levels increased and interest coverage ratios decreased as loan demand, competitive market conditions and excess capital created more favorable terms. According to S&P Leveraged Commentary and Data, Senior Debt/EBITDA for large corporate LBOs expanded to 4.5x, the highest level since Q3 2008. Middle market senior leverage levels grew to 3.5-4.0x Senior Debt/EBITDA with incremental financing provided by mezzanine debt sources. Additionally, borrowers further benefitted from low leveraged loan yields and historically low interest rates, which drove down the all-in cost of capital and generated optimal debt market conditions.
Outlook for 2013
Verit believes that the broader debt capital markets and overall loan activity will remain strong in 2013 due to strong technicals, increased leverage availability, historically low interest rates and a likely uptick in transaction activity. While there are certainly unresolved macro issues in place, Verit expects strong transaction activity in 2013 related to “aged” private equity portfolio companies and private business owners continuing to evaluate liquidity alternatives. Anecdotally, Verit has seen an increased appetite from both bank and non-bank financial institutions that are eager to deploy capital and lend to middle market businesses. Access to capital for middle market borrowers now goes well beyond traditional commercial banks and encompasses non-bank financial institutions, Business Development Companies and alternative capital sources. The significant competition among debt arrangers, coupled with an appetite for larger lender hold positions, has created opportune borrowing conditions. Verit expects strong credit markets to continue into 2013 which will create compelling opportunities for companies to pursue strategic alternatives through a variety of attractive debt capital solutions.
As always, it is Verit’s vision to bring a fresh approach and customized solutions to advise private business owners on ownership transition alternatives.