Leveraged finance deals are getting done - at a price
Banks are providing leveraged finance, despite reports that there is no money available for buyout deals, but the terms are very different from the private equity boom days of 2006 and 2007.Westpac head of leverage and acquisition finance, Greg Clark, told last week's Australian Private Equity and Venture Capital Association (AVCAL) conference that loan sizes would be small, terms would more likely be three years than five and that leverage would be between 2.5 and 3.75 times earnings.Clark said: "Leveraged finance of five times EBITDA is not coming back."Other "bank-friendly" terms being imposed in the current market include 50 per cent equity in the capital base, and only a small amount of subordinated debt.But Clark said deals were being done. "Banks are very careful about where they are choosing to put their capital. In the old days we went through the credit committee."Now we talk to the credit committee, the investment committee and the pricing committee. We look at the customer relationship issues, cross-sell potential of a deal and any hedging requirements."Clark said the Basel II capital adequacy rules were an important factor. The risk weighting of an LBO secured finance deal has changed significantly.Clark says that for a three-year deal with a client rated BB- the risk weighting has gone from100 to 169 per cent. For a client rated B+ the risk weighting has gone from 100 to 210 per cent.For a five-year deal with a client rated BB- the risk weighting has gone to 206 per cent and for a client rated B+ the risk weighing has gone to 245 per cent.Another change is that under the old rules undrawn lines carried 40 per cent of the risk weighting of drawn finance. Now undrawn lines receive the same treatment.Credit Suisse Asia Pacific head of leveraged finance, Michael Tierney, also speaking at the AVCAL conference, agreed that the Basel II regime would change lender behaviour. He said it would be difficult for some deals to come up with an attractive business case with the sort of leverage and tenor lenders were talking about.Tierney said: "They will need to find some funding diversification." Cameron Buchan, managing director of the private equity group CHAMP, said his group had done three LBO deals during the financial crisis but he said it was not easy to get leveraged finance and costs were very high.CHAMP has sponsored buyouts at Centric Wealth, a financial planning group, Alleasing, once part of the Allco stable, and LCR Group, an industrial services company that is involved in bulk materials handling, transport and mining services.Buchan said: "When the banks were paying 10 basis points over the bank bill swap rate for funds we were paying a margin of 225 points. Now that they are paying 100 points over we are paying 425."He said interest rates on mezzanine debt, at around 20 per cent in some cases, were also very high.Merrick Howes, a director of the mezzanine funding specialist Shearwater Capital, said: "You can't make LBOs work on three-year debt.