Companies funding sponsor buyouts in Europe's broadly syndicated loan market are doing so at the lowest leverage levels in more than a decade — though there remains an unprecedented reliance on first-lien structures in the debt funding mix.
Ahead of an expected ramp-up in M&A and LBO activity in 2025, buyout transactions tracked by LCD show that average pro forma leverage fell to just 4.6x over the 12 months through the end of October, marking a significant curtailing of risk from a post-crisis high of 5.9x in 2022.
Leaning in
However, with financing costs at historically expensive levels, companies are leaning heavily on first-lien debt. Leverage raised this past year from second-lien loans or junior debt is near negligible by comparison. In previous years, the average second-lien debt/EBITDA ratio among LCD’s sample of tracked deals was 0.21x in 2023 and 0.40x in 2022. Leverage from other debt in these same years came in at 0.15x and 0.53x, respectively.
In this skew to first-lien loans, October was the first month since January 2022 to host an unsecured bond placed via broad syndication to fund a corporate buyout, courtesy of a cross-border transaction from Atlantica Sustainable Infrastructure.
Loan issuance, meanwhile, at €15.2 billion to fund buyouts in the 12 months through the end of October, has recovered from the 14-year low of €7.6 billion in 2023. This latest tally however remains well down on comparable and full-year totals of 2022, when central banks globally began hiking rates. Prior to that, €47 billion was issued in 2021 — the highest such annual supply since 2007.
Funding costs
Underpinning these trends are elevated funding costs. The average yield to maturity for term loan Bs funding buyouts continues to sit above 8%, according to LCD. Though down from a high of 9.7% in mid-2023, this reading remains significantly higher than the banner year of 2021, when new-issue loan yields hovered at a 4% handle.
In addition to shifting the debt funding mix, the knock-on effect of higher all-in yields is a reduction in purchase price multiples paid by sponsor companies. LCD’s data shows that this metric for deals financed in the broadly syndicated loan (BSL) market remains below 10x, and is the lowest since 2015.
In an effort to lower leverage expense, private equity firms continue to offer relatively higher equity infusions. In the 12 months through end-October, equity contributions hit 47%, up from 44% in 2023 and 42% in 2022.
Green shoots
Despite historically high debt costs and equity contributions, indications at the sponsor level point to healthy refinancing activity, but also the green shoots of M&A and buyout deals. In the year to date, sponsored leveraged loan issuance, at €72 billion, far exceeds the full-year totals for 2023 and 2022. While loan volume supporting buyout activity is bouncing back, loan supply supporting other M&A activity by sponsored companies hit €15.3 billion this year — double the 2023 total on that measure, and the highest such reading since 2021.
When including non-sponsored companies, an October revival brought the highest level of monthly institutional M&A-driven issuance (€6.05 billion) in three years. Of this supply, however, only two deals totaling just under €1 billion were new LBOs. These transactions were a loan backing the Onex Partners-led buyout of German cartridge packaging group Fischbach, and financing to back the buyouts of Robot Coupe and Magimix (via holding company Umami).
At the transaction level (which reflects total sources of funding for buyouts, including debt and equity), LTM LBO volume has increased by nearly 90%, to €26.4 billion, from €14.1 billion in 2023.
Encouragingly — for those waiting for the recent standoff in sponsor exit activity to end, and eyeing the redeployment of capital for new deal-making — secondary buyouts have rebounded from 2023 lows, accounting for 69% of buyouts so far this year. This share is up from 46% in 2023.
Given that the challenging exit environment has limited the ability of private equity firms to realize profits from portfolio sales, sponsors have instead looked to extract dividends from debt raises, prompting a heady pace of issuance for this purpose. Indeed, €10.6 billion of institutional loan issuance funded dividend recapitalizations in 2024 — a three-year high.
Looking ahead, while the leveraged loan asset class is expected to remain an outsized beneficiary of M&A supply into 2025 — driven partly by the supportive demand technical from record CLO ramping — secured debt raises are also testing the waters in the European high-yield market, with October bringing the largest count of M&A and LBO bonds in two years.
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