Debt multiples for LBOs targeting companies with over $50 million in EBITDA hit post-Lehman highs in the second quarter, according to S&P Capital IQ/LCD. Multiples were on average 5.9 times, up from 5.6 times in the first quarter and 5.4 times last year.
S&P says there are three reasons driving the debt binge. Low default rates buoyed by the Fed’s ZIRP policies have benefitted the credit markets. Second, company shares are trading at record highs, requiring more leverage to acquire. Finally, low borrowing rates in the junk loan and bond markets have increased coverage ratios despite the increase in debt multiples.
S&P says that leverage multiples are up despite concern from the Fed and OCC in the last year that banks are allowing their underwriting standards to slip.
Meanwhile, the junk loan and bond markets are seeing different levels of investor interest. The loan market saw its seventh consecutive investor outflow last week, for a total of $1.5 billion. The junk bond market, however, has seen inflows of $2.8 billion over the last eight weeks.