According to the recent BMO Harris Bank Transaction Trends Report, third-quarter middle-market deals continued to follow trends from previous periods, with leverage remaining at historically high levels. Maximum leverage in the quarter reached a 2015 high of 6.6x, and average leverage for all deal sizes remained above 5x for the sixth straight quarter. While the senior multiple in transactions with both senior and mezzanine debt has remained relatively consistent, the senior multiple in transactions with only senior debt continued to increase.
In the larger market, pricing drifted higher throughout the third quarter as speculation surrounding the Federal Reserve’s plan for a possible interest rate increase is causing significant disruption. In contrast, the middle market saw limited fluctuations in pricing, continuing to price risk in the mid-5% range (Libor+450/1% Libor floor) as liquidity remains high.
Meanwhile, the CLO continues to be the vehicle of choice for many of today’s debt buyers in the leveraged finance industry. While projected to be 20% lower year over year, CLO issuance in 2015 will still be the second largest on record (2014 being the largest). But 2015 has proven harder for first-time managers to raise money as investors prefer to fund seasoned managers. Also, many predict that risk retention rules—which take effect at the end of 2016—will lead to a decline in both the number of CLOs and dollars raised by CLOs going forward.
To learn more about what’s behind these and other developments, contact Stephen R. Isaacs,
BMO Harris Bank Managing Director—Group Head, Sponsor Finance, at +1 (312) 461-6236 or firstname.lastname@example.org.
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