Private equity-backed companies looking to grow through acquisitions have been an active lot in the U.S. leveraged loan market this year.
Institutional loan issuance backing sponsored add-on transactions has surged to an all-time high for the first five months through June 5.
At $38.6 billion, this add-on volume is 44% higher than the comparable year-to-date total in 2017, which itself represented the previous peak during this observation period. Despite the year-over-year rise, the full-year 2017 total was a record $64.4 billion of sponsored add-on issuance, 58% of which was booked between June and December.
The growing amount of sponsor-backed acquisitions is partly related to the upward trend in traditional leveraged buyout activity in recent years. Buyout volume in the U.S. increased in 2016 and 2017, and last year hit its highest level in 10 years, at $95.2 billion. Of the private equity-owned issuers that approached the loan market with tack-on M&A financing in 2018, 27% were acquired via a new leveraged buyout, or LBO, in 2017.
In addition to high LBO supply, escalating purchase price multiples are another reason for rising add-on M&A. Private equity firms are increasingly focused on growing existing portfolio companies via synergistic tuck-in acquisitions that can help reduce the average cost of a transaction over time.
About those costs: The average LBO purchase price multiple over the past three years was more than 10x, peaking at 10.6x in 2017, according to LCD. There is some retraction this year, to 9.9x, but that level remains high compared to historical norms. The average over the 10 years ended 2017 is 9.2x.
The trend is also apparent on the other side of the pond. Sponsored add-on loans in Europe total €10.7 billion year-to-date, roughly triple the amount over the comparable period a year ago. In fact, the 2018 total already is close to the full-year 2017 volume of €11.2 billion. Combining the U.S. and Europe, add-on volume so far in 2018 is $59.9 billion, up 78% from the same time last year.
Some recent deals offer examples of sponsor-backed issuers using return trips to the loan market to finance acquisitions, such as Ascensus, which provides retirement planning and college saving services; Safe Fleet, which owns a portfolio of brands that provide safety and productivity solutions to fleet vehicle manufacturers and operators; and Tekni-Plex, which manufactures packaging, packaging products and materials, among other things.
Ascensus recently wrapped a $200 million add-on, marking its third such transaction over the past year. The incremental B term loan included a $125 million funded tranche and a $75 million delayed-draw for potential acquisitions.
Regarding delayed draws, sponsors increasingly are tapping into excess investor capital to put commitments for additional debt in place from the get-go. Thus far this year, 17% of new LBOs have included delayed-draw tranches, up from just 4% over the same period last year. Moreover, the 11 buyout deals LCD has tracked with delayed-draw term loans nearly matches the 14 for all of 2017.
LCD is an offering of S&P Global Market Intelligence.