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Trends in LBOs: Fitch Report
Practical Law Legal Update 5-521-4625 (Approx. 2 pages)
Trends in LBOs: Fitch Report
by PLC Finance
| Published on 20 Sep 2012 • USA (National/Federal) |
Fitch Ratings published a report discussing current trends in US leveraged buyout (LBO) activity and their implications for the buyout sector for the remainder of 2012.
On September 18, 2012, Fitch published a report on recent trends in the US leveraged buyout (LBO) market. The report noted that LBO activity in 2012 has not exhibited the hectic pace that many market watchers had expected to see. Buyout volumes by private equity firms remain low, with total invested capital by private equity firms down 66% from 2011. However, Fitch believes that for the following reasons buyout activity could pick up during the remainder of 2012:
- Private equity firms currently have high levels of investable cash.
- Strong demand for loans continues to push interest rate spreads lower, which should enable private equity firms to leverage their returns on invested equity more effectively. According to Fitch, single-B institutional loans spreads have decreased from 575 basis points in 2011 to 450 basis points presently.
- Certain tax cuts that are due to expire on January 1, 2013.
LBO loan issuance through August 2012 totaled just $20 billion, compared to $47 billion for the same period last year, and just a fraction of the $207 billion seen in 2007 at the peak of the LBO market.
The report noted several structural trends in recent LBOs:
- Average buyout sizes have continued to decrease in 2012 to approximately $250 million. Among private equity firms, the focus is on deals in the $1 billion to $2 billion range, for the most part in the manufacturing, retail, technology and healthcare sectors.
- Total leverage multiples on LBO deals have loosened, currently standing at around 5.5x, up from 5.0x at the end of 2011.
- Average equity contributions dropped to under 35% in the third quarter of 2012. Average equity contributions have declined steadily during 2012 from approximately 45% in the first quarter and 40% in the second quarter. This compares to average equity contributions exceeding 50% during the credit crunch.