Investment banks, which faced significant losses on risky merger and acquisition (M&A) loans due to a spike in global interest rates, are now aggressively returning to the leveraged buyout (LBO) market — one of the most profitable sectors in finance, according to a report by Bloomberg.
Traditional lenders and private credit firms are signalling to private equity sponsors, that they’re ready to provide over $15bn in debt for a single high-yield transaction. This is roughly 50% more than last year, when many loans remained on lenders’ books as central banks raised interest rates sharply to combat inflation.
“The range of what sponsors can raise globally has expanded significantly over the past year,” said Dominic Ashcroft, head of EMEA leveraged finance at Goldman Sachs Group Inc. “The loan and bond markets have matured both in Europe and the US, and when you add private credit into the mix, you’re approaching the €13bn to €15bn mark.”
As the global economy cools, Wall Street’s LBO engine is revving up again. Banks, now looking past the “hung debt” period caused by Russia’s invasion of Ukraine and soaring interest rates, are resuming lending activity. In the US, dealmaking is gaining momentum with renewed market optimism following the first interest rate cut by the Federal Reserve in four years. Lower borrowing costs enable private equity firms to take on more debt, making them stronger contenders in competitive bidding for acquisition targets.
So far this year, announced mergers and acquisitions have totalled around $2.4tn — a 22% increase compared to the same period in 2023, according to Bloomberg data. Major buyout deals currently in focus include the potential sale of French drugmaker Sanofi’s consumer health division, valued at about €15bn ($16.6b n), and a €10bn ($11bn) valuation being discussed for German generic drugmaker Stada Arzneimittel AG.
Investment bankers are pitching comprehensive financing packages, including senior loans, bonds, and junior debt for these deals, according to sources familiar with the matter. This heightened competition is already impacting margins, with senior loans for high-quality European companies rated single-B being priced at around 350 basis points over the benchmark, down about 100 basis points from last year, the sources said.
Lending limits have also increased. Lenders can now offer leverage ratios exceeding 7x EBITDA — a level not seen in 12 to 18 months, according to Roxana Mirica, head of capital markets in Europe at private equity firm Apax Partners LLP. This brings lending conditions back to pre-crisis norms.
By combining various sources of funding, total lending capacity for a single deal can exceed $15bn. In Europe, sponsors can potentially secure around €2bn in euro loans, double the amount from last year, along with €2bn in senior euro bonds. In the US, they could raise about $5.5bn in senior loans and $3.5bn in bonds, with an additional £2bn available as junior capital from private credit firms.
Goldman Sachs Asset Management, Blackstone Inc., and other large private credit lenders are increasingly collaborating with banks on these financing arrangements, according to Fergus Wheeler, a partner at law firm Latham & Watkins in London. “Their flexible investment mandates allow them to offer a wide variety of tailored capital solutions to sponsors and corporations,” he said.
