Global warming for LBO

Bankers say that last year’s trend of leveraged buyout (LBO)-related high-yield supply is set to continue into 2005. But the pace of supply will depend on the strength of the initial public offerings (IPO) market: the weaker that market is, the more attractive the high-yield market becomes as an alternative for private equity firms.

Such firms often used the high-yield debt finance market in 2004 to recoup their initial investments, after the traditional route of IPOs went sour.

Last year saw a boom in sponsored buyouts in Europe, with deals totalling over $50 billion. And, whereas LBO-related high-yield issuance once tended to come from the telecoms and technology sector, sponsored buyouts now come from a stable and diversified base. Germany and France in particular are expected to be hotbeds of LBO activity this year – and anecdotal evidence suggests there could be up to $60 billion globally in private equity war chests earmarked for sponsored buyouts.

The topic was discussed at January’s meeting of the European High Yield Association. Some bankers were cautious about supply prospects, saying that sponsored deals do not offer “a sustainable business plan for us to depend on, in terms of deal flow”.

But the buy side is concerned that the increase in LBO deals is a threat to the fundamental credit quality of the sector.