Big-name investment banks are making determined efforts to gain the upper hand in leveraged buyout (LBO) financing, reviving the once lucrative fee-generating mechanism. Among them,
Goldman Sachs Group Inc. and Barclays Plc are not only scanning the market for safer deals but are also venturing into riskier territories including subordinated debt deals, a form of financing that they have previously been cautious about.
As disclosed by people with knowledge on the matter, at least one unnamed bank is offering payment-in-kind options, which allow deferring interest payments. Certain banks are also discussing with borrowers the possibility of pre-capitalizations, which provide funding to companies even before a deal has officially hit the market.
The headlong pursuit of gaining the larger share of the buyout pie is driven by a desire to earn more fees after a period peppered with losses; during this time, debts stagnated on their balance sheets which cleared the path for direct lending giants, such as Blackstone Inc. and Ares Management Corp., to rise to prominence. As the markets for broadly-syndicated loans and junk bonds are on the upswing again, banks are finding them easier to vend, often beating private lenders on pricing.
Despite being recently bested by private lenders, banks have begun to make a slow and steady comeback. Recently, in a notable victory, Morgan Stanley and Goldman Sachs managed to poach nearly half of a $5 billion deal lined up to refinance the debt of Ardonagh Group Ltd. from direct lenders. Likewise, JPMorgan Chase & Co. and Goldman Sachs also recently secured a $5 billion deal to finance KKR & Co.’s purchase of a stake in Cotiviti Inc.
The competitive spirit exhibited is not restricted solely to outbidding private creditor rivals. Banks are also exploring innovative techniques to win deals. Among the various strategies in play, a notable one is the concept of pre-capitalizations – an innovative method where lenders refinance a firm’s debt and add a portability clause, allowing a new purchaser to keep the existing debt package intact. This is viewed as an attractive option because it eliminates the need for new owners to procure their own financing.
While refinancing is the current talk of the town, global banks are still pining for mergers and acquisitions (M&A) to resurface, given that the meat of their revenue is generated from such deals. As the market stabilizes further and competition resumes in full swing, it’s safe to say the fight for dominance in the LBO market is just beginning to heat up again.