The resurgence of U.S. leveraged loan issuance in the second half of 2020 has come from many directions, and among them is rebounding supply from transactions supporting private equity-backed buyouts, which all but dried up early in the year as the spreading pandemic gripped financial markets.
Institutional loan volume tied to LBO deals rose to $9.5 billion in October (through Oct. 27), the second-highest monthly total this year behind January's $10.8 billion. The recent figure builds on the $7.1 billion total in September. Including high-yield bonds, U.S. leveraged finance volume to fund LBOs has risen to $11 billion so far in October, a four-month high.
This activity is being fueled increasingly by sponsor-to-sponsor transactions, or secondary buyouts, such as KKR's acquisition of 1-800 CONTACTS Inc. from AEA Investors LP and THL, and Onex Corp.'s acquisition of a majority stake in OneDigital Health and Benefits Inc. from existing sponsor New Mountain Capital LLC. In October alone there were eight secondary LBOs financed in the loan market, versus five deals that were not sourced from an existing private equity firm. In comparison, sponsor-to-sponsor deals were outpaced in the first three quarters of this year. Moreover, October's eight sponsor-to-sponsor deals are only two shy of the total for all of the first quarter.
Even with the recent bounce-back, LBO volume this year still badly lags 2019. As of Oct. 27, the $52.9 billion of loan supply from deals supporting buyouts is down 35% from the comparable period a year ago, according to LCD. Also, year-to-date M&A activity for issuers backed by private equity firms is down 36% year-over-year.
However, financial sponsors have not been standing pat. To meet growing demand from loan investors, refinancing activity for private equity-owned borrowers is up 31% this year and dividend recapitalizations have surged 47%. To the latter point, the $10.3 billion of recap volume in September from sponsored borrowers was the highest monthly total on record. When combined with volume of $6.2 billion in October, the $16.5 billion tally is the most for any two consecutive months. These figures include some recently minted LBOs, such as The Blackstone Group Inc.'s Bumble (aka MagicLab) and Pretium Packaging LLC, which was acquired by Clearlake Capital Group LP in January.