Bond-backed buyouts balloon as loan yields hit astronomical levels

Issuers tapping public syndication for leveraged buyouts have turned to the high-yield bond market in recent months, where levels of activity are impressive considering the current shortage of new money issuance.

In contrast, just $5.9 billion made its way through the institutional loan market this quarter in aid of leveraged buyout facilities. Loan buyout volumes have historically exceeded bonds by an order of magnitude.

Buyout activity in the bond market is also slightly up versus 2022, sitting at $8.5 billion for the first five months of the year. Meanwhile, overall new money bond activity totals $17 billion so far in the second quarter, only slightly behind the average levels seen in 2013-20.

The amount raised in the loan market in April and May also stemmed from four issuers. Blackstone made two buyouts, with its acquisitions of Cvent and Emerson.

In addition, Lovell Minnick Partners purchased Pathstone, and CD&R bought Focus Financial. Other M&A financing accounted for under $2bn in May and stemmed from six deals.

The disparity between loans and bonds is linked to the pricing on the respective facilities. In isolation, bond pricing movement in recent quarters does not look to be an exciting catalyst for new money paper. Yields have remained roughly equal to levels seen in the preceding four quarters, with the average sitting at 8.4%. Similarly, yields in the secondary bond market have varied little since June 2022.

Compared to astronomical loan yields, however, the bond market looks positively enticing. The average yield on first-lien institutional facilities has exceeded 10% overall, rising to 11% for debt backing the LBO deals that have been signed this year.

Of course, the predominantly fixed nature of bond markets and the floating-rate nature of loan markets mean coupons on the latter instruments will shrink in step with central bank target rates. But recent attempts to predict interest rate movements have resulted in many losses from asset managers.