Leveraged Loans Pave the Way On Wall Street

The Federal Reserve last week indicated it is ready to begin tapering “soon,” hinting that the era of ultra-easy money will soon be winding to a close. And on Wall Street, the looming end of the free money era means it’s time to back up the truck — the grown-up equivalent of “last licks” on the T-Ball field.

Private equity-backed companies have issued a whopping $120 billion of leveraged loans this year, just shy of the $124 billion record set in the first nine months of 2007 — notably, the eve of the Great Financial Crisis.

They Have All The Leverage

Everything about this year’s private equity bonanza is bigger than usual:

• The average leveraged buyout was valued at $2.5 billion this year, well above the mean of $2 billion in 2007, according to S&P.
• The average debt on LBOs in 2021 was 5.67 times EBITDA (a proxy of cash flow), compared to 5.41 times in 2013.

So What’s Driving the Surge? A number of factors are at play. All of them, naturally, relate to the figurative bottom line. Kearney Posner, a portfolio manager at Lord Abbett told the WSJ, “The tax hike is looming on the horizon and sellers want to maximize what they can make.”

For LBO specialists, a bevy of willing sellers is a welcome reality. Going into the year, private equity shops were sitting on roughly $1.5 trillion in so-called “dry powder,” or yet-to-be invested capital.

Anything to Worry About? Relative to the last financial crisis, the broader financial system appears to be relatively well insulated. Investment banks are reportedly carrying roughly $130 billion of leveraged loans on their balance sheets, compared to $480 billion 2007 — the rest having been packaged-up to private investment firms, pensions, and insurance companies.