What outlook for LBO?

The total amount of transactions in the LBO sector has doubled between 2009 and 2010, going from 121 billion US dollars in 2009 to 225 billion dollars in 2010. These figures are obviously disproportionate to those before the crisis in particular to the amount of 801 billion dollars in LBO transactions in 2007!!! In 2010, the largest transaction occurred mainly on the American and Asian markets, but Europe still recorded a trading volume of 75 billion USD.

HOW DOES ONE EXPLAIN THE RETURN TO CENTRE STAGE OF LBO?

 Quantitative easing in the USA

In order to re-stimulate the economy and stem the loss of liquidity, the Fed introduced "quantitative easing" (QE1 and QE2) : this "unconventional" monetary policy is the Fed ’s purchase of American Treasury bills and bank credits. Such policies have been able to inject money into the economy and provide liquidity to banks to enable them to be able to give loans to businesses and help relaunch LBO operations.

 Financial windfall for investors

At the end of 2010 Private Equity firms had, at their disposal, a war chest of 964 billion USD (about 680 billion Euros) to invest. A good part of this disposable capital ("dry powder"), about 434 billion USD, appears to be mainly in the hands of LBO funds, which should now invest this windfall in new businesses

 Use of high yield

There is a real dynamic in the primary market for high yield bonds. In fact, 2010, saw a new record of issues exceeding 30 billion USD, within the Euro Zone. The last record was in 2006 to the tune of 27 billion USD. Businesses under LBO have understood this dynamic and are appealing strongly to this market. In fact, even if this type of product may prove expensive for the issuers, it is less restrictive than bank debt owing to the lack of covenants.

IS THIS RE-EMERGENCE OF LBO OPERATIONS A LASTING PHENOMENA ?

This is a justified concern for the following three main reasons:

 The implementation of Basel III

New regulatory requirements that banks will face from 2013, as part of Basle 111, will, undoubtedly, affect business models and force businesses to optimise capital allocation and manage liquidity. It is clear that such measures are going to force banks to increase their capital; it is for this reason, that European banks will have to find 84 billion euros by 2015 and 460 billion euros by 2019 in order to obtain sufficient capital to meet the prudential ratios.

As a result, banks will have to reconcile their different businesses in order to try to balance solvency, liquidity and profitability. In this context, will the LBOs be the losers?

 The 2013 wall of debt: a Damocles sword for businesses under LBO

In 2013 businesses will be faced with the famous Wall of Debt (3600 Billion USD have to be repaid globally by 2013) As far a European leveraged loans are concerned, these refinancing needs will be split as follows: 39 billion in 2013 and another 66 billion in 2014. Will the businesses concerned be up to the challenge in such a context of economic and financial uncertainty?

 An economically and financially unstable environment

The sovereign debt crisis, extreme volatility of the financial markets all help to feed this anxiety in the future of the LBO sector. Businesses under LBO will undoubtedly have more difficulties in generating sufficient results needed to satisfy not only their repayment obligations but also to continue to develop their business.

In the light of the above, the future of the LBO seems to subscribe to alternative methods, yet remains a viable product, despite its atypical characteristics, (financial leverage and tax) and its economic goals (purchase of businesses). However the durability of this product is only at the expense of a less risky financial plan than some years ago with in particular:
1) rebalancing between equity and debt, and
2) less significant operational costs