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Global Private Equity industry faces challenge of refinancing USD814bn of LBOs by 2016

Over USD814bn of leveraged buyout (LBO) debt, spread over 6,055 deals held by private equity portfolio companies globally, is due to mature over the next six years with over USD80bn (across 752 deals) due for refinancing this year alone. A peak of almost USD200bn is expected in 2014, according to a new report by international law firm Freshfields Bruckhaus Deringer.

The issue appears to be almost exclusively a European/US affair. European private equity portfolio companies account for more than half (52% or USD424bn) of LBOs maturing by 2016, ahead of North America (43% or USD352bn). The positions are reversed this year when North American LBOs will need to refinance a slightly higher amount (USD39.2bn) of debt than their European counterparts (USD36.6bn). For the six year period the refinancing challenge is far less acute for Asia (including Japan), where almost USD21bn will need refinancing, and Australasia (USD13bn).

Notwithstanding the prospect of major refinancing exercises, PE houses are beginning gradually to invest their cash reserves once more, the value of global leveraged buyouts in 2010** increasing by over 204% (to USD131.8bn) compared to the previous year (USD43.3bn). The volume of deals also increased by over 72% to 923. These investment levels are still a far cry from the pre-credit crunch peak, the value of global LBO deals in 2006 standing at USD600.1bn spread across 1,460 deals.

"LBO refinancings are ramping up with USD80bn due for refinancing this year alone and USD92bn next year, followed by a whopping USD174bn in 2012 and USD196bn in 2014. Only by the middle of the decade will pressure start to ease," says David Trott (pictured), head of UK banking at Freshfields. ‘If the pipeline we are seeing is anything to go by, private equity shareholders are likely to pursue selling down their interest in leveraged corporates via an IPO while at the same time prepaying a significant amount of outstanding finance debt.’

"Orderly fashion refinancing exercises can also be envisaged thanks to more settled lending conditions across markets; the amount of ‘dry powder’ or financial resources accumulated by PE houses before the credit crunch which could be used as junior or senior debt; a growing liquidity in the high yield bond market which last year saw more than USD317bn raised globally, more ‘extend and amend’ solutions where lenders get better terms in exchange for extending loan maturities, and  evidence of renewed activity in the CLO market," he says. "Given the sheer volume and size of maturing LBOs a large number of businesses will require some form of debt restructuring, with an armoury of solutions likely to be deployed.

"These will include full balance sheet restructurings where the value of loans could suffer from impairment or even be converted into equity; equity holders offering to put in more capital in exchange for deleveraging; covenant resets with an equity injection and maybe a maturity extension being factored in, and a structured solution provided by  debt holders where equity holders decide to let their interests in the business go, or insolvency in cases where there is no value in the business –  though this will be rare."

Chris Bown, head of Freshfields’ London private equity team, says: "Despite the wave of debt heading for shore, 2010 has seen some good evidence of LBO activity reigniting in the market with investment levels almost as high as the previous two years put together, though still a far cry from the 2006 investment peak which, to put it into perspective, was 4.5 times greater than 2010 levels.

"While the US accelerated past Europe in terms of deal value last year, moving from a 43% to a 60% share of new deals globally, the data shows that was based on a smaller number of large deals which would imply that the US is moving ahead with large cap deals while European players are still focused on smaller transactions.

"Economic and lending conditions are certainly improving but getting deals off the ground is still proving challenging, not least because past solutions are no longer workable in what has become an even more complex and unpredictable market and where creativity and new techniques, which generally take longer to implement, are needed."
Looking ahead to 2011, there is cause for optimism as well as caution says Bown.
"Private equity houses are starting to deploy their dry powder reserves – estimated at over USD1trillion – and this is causing ripples in the market; high yield is becoming more accepted and in turn this is making some banks more willing to provide debt. On the whole, after a period of ‘waiting and seeing’ how the economy was going to turn out we are sensing more confidence and seeing the pipeline gradually fill out."

In contrast however, there are a number of factors still holding the market back. "There seems to be a lack of enough assets at the right price to generate interest among private equity houses. While retail and technology are proving popular, real estate is still recovering from having gone into virtual hibernation, while consumer staples companies and media and entertainment firms, most vulnerable to contractions in consumer spending, are also less sought after.

"On the financing side, many banks are holding large private equity-related credits and are under financial pressure to clean up their balance sheets and under political pressure to direct lending towards small-and medium-sized enterprises rather than leveraged deals. New regulations on the largest international banks under the Basel III rules will also curb lending,’ says Bown.

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