LBO Sector Turning to Institutional Investors
Tarquinio, J. Alex, American Banker
The leveraged buyout community is increasingly relying on institutional term loans to finance its deals.
These loans-which are tranches of syndicated bank loans designed for insurance companies, retail mutual funds, hedge funds, derivative structures, collateralized loan obligations, and other nonbank investors- have emerged as a major source of funding for LBOs in recent years.
Last year institutional investors plowed $11 billion into term loans to finance larger leveraged buyouts-those valued at $250 million or more- according to Portfolio Management Data, a subsidiary of Standard & Poor's.
That represented 23% of the financing for these buyouts, up from 18% in 1995.
"Institutional investors have exploded in this market," said Michael H. Rushmore, managing director of loan research for BancAmerica Robertson Stephens. "They have a voracious appetite for floating-rate, high-yield term loans."
Mr. Rushmore predicted that the leveraged buyout community would develop an even greater dependence on institutional term loans.
Bank debt as a portion of LBO financing has remained pretty steady at about 45% throughout the 1990s. But the size of the average bank revolver and bank-financed term loan for LBOs has been decreasing, even as the total volume of leveraged lending to the LBO market has increased.
The commitment of bank capital for buyouts valued at $250 million or more has dropped from 27% of the total deal value in 1995 to 15% in 1997, according to Portfolio Management Data.
Institutional investors are also taking on larger roles in individual LBO loans. This year 25% of LBO loans traced more than half of their capital to institutional investors. This was true for just 16% of last year's LBO loans, 6% of 1996's, and none of 1995's.
Howard Tiffen, senior vice president and portfolio manager of Pilgrim America's Prime Rate Trust fund in Phoenix, said banks have shifted more of their loan risk to other investors in recent years to make better use of their balance sheets. …