Aside from the low interest rates, we are seeing looser terms on debt that were a feature of the the peak in private equity mergers and acquisitions (M&A) activity in 2007.
Chinh Chu, senior managing director of US-based private equity giant Blackstone Group noted the return of such terms, as well as the high levels of leverage available for deals.
Chu engineered Blackstone’s 2004 leveraged buyout (LBO) of Celanese and its subsequent initial public offering (IPO) in 2005 that netted a return of 6x its initial investment of about $650m. It was one of the most successful LBO deals in history.
Today it is possible to borrow at about 6-6.5 times the target’s earnings before interest, tax, depreciation and amortization (EBITDA) in a leveraged buyout – very close to the 7 times level in 2007.
Features available in the heyday included payment-in-kind (PIK) options and covenant-lite loans. With a PIK option, the borrower can pay back debt with more debt. Covenant-lite loans contain fewer restrictions, such as maintaining a level of cash flow. Nobody would have predicted these would come back so quickly.
The only major difference today versus 2007 is that the absolute amount of funds available to borrow is less, being able to facilitate deals up to $8bn, versus $20bn in 2007, noted Chu.
That level is still plenty to drive a robust amount of chemical deals. Expect private equity to play a bigger role in chemical M&A in 2011.
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