US LevFin Wrap — Early signs of an LBO comeback?

Nicolle Liu
+William Hoffman
+ 1 more

2 August 2024•5 min read

This is our weekly newsletter on all things US leveraged finance, from the latest trends to in-depth coverage, to people moves. Explore all our market wraps here.

Many of us cheered for our favorite Olympic athletes this week, but debt investors had another reason to get fired up: LBO activity is showing signs of life, thanks in part to take-private deals.

And with market anticipation of rate cuts, confidence in more new deals is growing.

“There’s a lot of capital out there, and sponsors are getting more realistic about selling or buying at the right multiple,” said a banker.

Despite the recent selloff in the stock market on weak tech earnings and job data, a year-to-date equity market rally allows high yield-issuing companies that have been doing well to use their high valuations to fuel growth through acquisitions. On the flip side, underperforming companies attract private equity firms looking to deploy their capital and try to turn things around.

Nevertheless, some investors are wary of getting their hopes up too much.

“We’re seeing more deals get announced and chatter starting to pick so maybe that’s what changes it,” said Randall Parrish, head of public credit at Voya Investment Management. “But I’m not convinced we’re going to see a huge wave.”

Public companies gearing up

Public high yield issuers are increasingly using M&A to boost earnings, and funding those deals with new debt.

“When equity valuation is still very robust, but growth is slowing, M&A makes sense,” said a portfolio manager.

For instance Amentum, a government and commercial services contractor backed by American Securities and Lindsay Goldberg is merging with Jacobs’ Critical Mission Solutions and Cyber and Intelligence businesses to create a new publicly traded company.

JP Morgan led $1bn SUNs due 2032, priced at 7.25% at par, and a $3.5bn term loan B due 2031, priced at SOFR+225bps with an OID of 99.75 to fund the merger and pay a $1bn dividend to Jacobs.

The deal priced on the tight end of talk as debt investors bought in to a story of cost savings and improved leverage in contract negotiations.

“I believe that the bigger a company is, and the longer their relationships are with the government, the more effectively they can price,” said a buyside analyst. Read our Credit QuickTake for more.

Coming in the pipeline is Terex's acquisition of Dover Corporation’s Environmental Solutions Group which is expected to be funded with a mix of cash on hand, a new term loan B, and senior unsecured notes, according to S&P.

We also reported that Golden State Foods, a privately held supplier of food products to companies such as McDonald’s, is in the advanced stages of an auction process.

Chasing after the weak

Perhaps this week’s stock selloff will present private equity firms with more take private targets, especially among the names that didn’t benefit from the prior market run up.

“There are some companies that did not follow the rally. So those become a little bit more obvious as potential take privates by value buying sponsors,” said a second banker.

Take IT and management consulting firm Perficient, which saw its valuation drop significantly due to slowing growth. That made it a prime target for EQT Private Capital Asia. JPMorgan this week launched a $935m term loan b due 2031 for the acquisition with a price talk of SOFR 375-400bps and an OID of 99.

The company's stock price dropped from a peak of $148.21 in November 2021 to $48.11 on May 3, before the acquisition was announced on May 5. EQT will pay $76 per Perficient share, valuing the company at approximately $3bn.

“It was just trading at such a massive premium price that's expecting a very long, long tail of growth, and the moment that growth comes down or gets truncated with valuation, it just crashes,” said the portfolio manager. “But it doesn't mean they are bad companies from a credit perspective.”

Other credit investors are skeptical about the company’s non-recurring revenue nature that’s more focused on short term projects.

“In a kind of weak demand macro environment. It's not the credit you particularly want to plan, this spread isn't that attractive to incentivize lenders to commit,” a second buyside analyst said.

Other take-private deals that could come to market soon are Towerbrook and Clayton Dubilier & Rice’s $4.5bn R1 RCM buyout and KKR’s $2bn Instructure acquisition.

R1 RCM's shares peaked at $30.39 in February 2021 but fell to around $10 earlier this year. Similarly, Instructure's stock traded from a high of $28.25 to a low of $18.98 in April this year.

Consumer turbulence and building products buzz

US consumers are starting to show signs of fatigue, a trend reflected in the earnings reports of some public companies — Hertz for example, has continued to face loss with significant write-downs for its electric vehicle fleet (read our earnings review for more).

Against that backdrop, Walgreens is poised to tap the high yield bond market for the first time after being fully downgraded to junk status.

Meanwhile, building products companies are hitting a tricky point in the economic cycle. Last week, Wilsonart faced some challenges pricing its deal. Now this week, Cornerstone Building Brands (Credit Quicktake, Bond Legal QuickTake) and White Cap are in the market. Standard Industries is also repaying its existing term loan B due 2029with a $500m senior unsecured notes due 2032. We unpacked how lenders are feeling about this sector, particularly given that an interest rate cut could be on the horizon — check it out here.

Educational content maker McGraw-Hill also managed to refinance its $2bn debt with a $650m SSNs due 2031 and $1.317bn of the TLB to reduce its interest expense. For more on the business check out 9fin’s Credit QuickTake.

Elsewhere in the bond market, Royal Caribbean Group refinanced its 9.25% SUNs due 2029 and partly redeemed its 8.25% SSNs due 2029 with a $1.5bn SUNs due 2033.