Markets aren’t ready to blow LBO bubbles — yet
The buyout buzz is back. A growing number of publicly listed companies have become the subject of private equity stalking rumors. Harley-Davidson, RadioShack and Supervalu have all had the treatment recently. But bigger examples are likely to remain scarce for now.
The stunning recovery in credit markets accounts for a big part of the momentum. Leveraged loans have come along for the ride, surging from their troughs of around 70 cents on the dollar to trade above par on the Markit benchmark index.
The high-yield market is providing still more fodder for market chatter. Risk premiums continue to slide even though companies are flooding the market with new debt deals. For a hefty equity check in the range of 40-45 percent for a larger deal, bankers say another $3 billion might be available to borrow.
Some individual loans might be sellable too. For the right company, banks could probably find buyers for a $2.5 billion issue, Barclays Capital estimates. That view sounds optimistic though. Others put the cap at $1.5 billion.
These marginal improvements, however, don’t reflect the broader reality. It was a healthy loan market that made heady mega-deals of yesteryear, like the $32 billion takeover of energy giant TXU, possible. And that market has barely reawakened from the crisis-induced drought that killed off its biggest patron: the collateralized loan obligation.
These structured products — close cousins to the maligned collateralized debt obligations that snaffled up subprime mortgages — took on nearly 60 percent of carved-up leveraged loans during the boom, and helped provide the necessary reassurance to private equity firms and banks that bigger and riskier deals could be funded.
For now, investors can’t see anywhere near the returns necessary to revive the market for them. There were recent rumblings in credit circles that one small CLO was in the market.
It would be a start — but not yet of something big.