How far will leveraged buyout activity drop  in 2008? Sanford Bernstein analyst Brad Hintz says 30 percent in a research note on Thursday regarding U.S. and European M&A activity. Hintz says LBO activity will drop an additional 22 percent in 2009.

The curse of the credit crunch lingers on.

“The overhang of unplaced debt from 2007 transaction volumes, wider credit spreads and more conservative lending policies will limit announced 2008 global financial sponsor M&A activity,” Hintz says. “An economic slowdown in the USA and the EU will reduce corporate earnings growth and limit the willingness of corporations to risk new acquisitions. The overhang of $160 billion of unplaced deal paper, wider credit spreads in the debt market and tighter lending standards at syndicating banks will constrain financial sponsor demand.”

You can say that again. Of the roughly $350 billion worth of private equity related debt that got stuck on banks’ balance sheets last year, about 40% of that has been pushed off either through deals like TXU and First Data going through or cancellations such as United Rentals and Harman.

Wall Street is happy to have sold down that chunk of debt, but the banks are hardly in the clear in terms of getting the rest off their shoulders.

At the same time, deal fees to Wall Street, coming off record highs, are set to drop 20 percent this year, Hintz says.  
    
In the corporate strategic sector of M&A, Hintz expects a brighter picture in 2008-09. European strategic M&A volumes will fall 4% in 2008 before rising 6% in 2009, he says. For U.S. strategic M&A, Hintz expects a 10% decline in activity levels in 2008, followed by a 1% increase in 2009.

That’s an interesting twist on strategic M&A, as some analysts believe corporate buying will increase this year while sponsors sit on the sidelines. 

Hintz goes on to break down the M&A revenue percentages across Wall Street. 

“M&A revenues accounted for 6.9% of Goldman Sachs’ total net revenues in 2006. MS, LEH and BSC each generated about 5.0 to 5.5% of their 2006 net revenues from advisory fees,” Hintz writes. “Merrill Lynch is the least exposed to M&A as just 3.4% of its 2006 net revenues came from M&A activities.”

Too bad Mother Merrill’s exposure to subprime mortgages wasn’t as puny.

(Image: Bernstein analyst Brad Hintz)