Banks whip out cheque books for leveraged buyouts as rates fall

LONDON - Investment banks, forced to take big write-downs on risky merger and acquisition loans after a global surge in interest rates, are now jumping back into leveraged buyouts (LBO) - one of the most lucrative areas in finance.

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Traditional lenders and private credit managers are telling private equity firms, known as sponsors, that they can provide more than US$15 billion (S$19.6 billion) of debt on a single junk-rated deal. That is about 50 per cent more than in 2023, according to some market participants, when a number of loans were stuck on lenders' balance sheets after central banks hiked rates to tame inflation.

“The art of what is possible for sponsors to raise globally has grown significantly over the past year,” said Mr Dominic Ashcroft, head of EMEA (Europe, the Middle East and Africa) leveraged finance at Goldman Sachs Group.

“The loan and bond markets have grown in both Europe and the US, in terms of what is achievable and possible. Throw on top of that a slice of private credit, and you're getting towards the €13 billion (S$18.6 billion) to €15 billion mark.”

As the global economy cools, Wall Street's fee-making LBO machine is starting to crank up again.

Banks are putting losses from hung debt in the rearview mirror, after a period where lending appetite was crimped following Russia's invasion of Ukraine and as interest rates soared.