Loan-market participants are predicting the big one. Not an earthquake, but a $10 billion leveraged buyout. Indeed, according to some, such a megadeal is already in the works.
A $10 billion LBO would not only shake up the capital markets but also create a tidal wave of debt. But is it possible to arrange that much debt, given the so far anemic economic recovery and yet another debt crisis in Europe? For most market participants, the answer is a resounding "yes."
Despite "the most recent bout of volatility — the quantitative easing controversy and part two of the European debt crisis in Ireland — I believe a [buyout] of that size range is indeed doable," said a loan market analyst. "Banks have the balance sheet capacity, borrowing costs are attractive, private equity is clearly motivated to put money to work, and the funding markets are able and generally willing to take down a responsibly structured deal."
A New York investor said, "Not only is a $10 billion LBO possible, but I've heard that a couple of firms are already working on it," though he declined to be more specific. The Blackstone Group — with 22 deals under its belt — was this year's most active private-equity investor through the third quarter, according to PitchBook Data.
A banker speculated that Blackstone, TPG Capital, Goldman Sachs Group Inc. and Kohlberg Kravis Roberts & Co. — which has done five deals, according to PitchBook — could put together a $10 billion LBO "quite easily — if not alone, they could club it up."
Private-equity firms are sitting on an estimated $850 billion in capital, which they must deploy before their investment windows end and they have to return the money to investors. And seeing that they don't want to do this, market participants are certain that a massive LBO will appear in the pipeline soon.
Though a $10 billion buyout was not an extraordinary event during the LBO boom of 2006 and 2007, the largest of this year's deals has yet to top $4 billion.
Rumors were heard last month about a possible Yahoo LBO. In May, talks between Fidelity National Information Services and a Blackstone-led consortium fell apart. That deal was reportedly valued at roughly $15 billion. Of course, there's the issue of how a $10 billion LBO would be structured.
"It's slightly more complicated than thinking about a $5 billion loan deal and $5 billion high-yield deal," said another investor. However, he said, if sponsors consider taking advantage of collateralized loan obligation reinvestments, the ability to bridge a loan and the demand coming from banks and mezzanine funds, "there's a couple billion right there."
Most recent buyout and M&A deals have been structured with roughly 40% bank debt, 30% bonds and 30% equity. But for a $10 billion LBO to get done today, the high-yield bond portion would have to be larger, and the financing would have to include a significant mezzanine piece or another form of financing, sources said.
"If you're on a capital markets desk trying to figure out how to break it up right now, [the deal] would skew more bonds, given the keen appetite in the high-yield market," said Randy Schwimmer, the head of capital markets at Churchill Financial.
The trick for private-equity firms is not making the mix too messy or the leverage too high.
"The target's balance sheet leverage has to be in the more modest area, around 5-times," said the loan market analyst. "It would also have to be priced right. If the underwriter[s] follow the blueprint and a 40%, or $4 billion, bank loan piece is carved out of $10 billion, a significant portion of that would likely go to commercial banks, which have become a significant buyer of leveraged loans, and other bulge-bracket banks."
There would also be a large institutional loan piece, but it would have to be priced at a higher rate than the average of Libor plus 400 basis points, sources said.