Leverage loans lead the way on Wall Street

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The Federal Reserve signaled last week that it was ready to start cutting “soon”, hinting that the era of super-easy money would soon be coming to an end. And on Wall Street, the looming end of the free money era means it’s time to save the truck – the adult equivalent of “the last licks” on the T-Ball pitch.

Private-funded companies issued $ 120 billion in leveraged loans this year, just below the record $ 124 billion set in the first nine months of 2007, especially on the eve of the Great Depression Financial.

They have all the leverage

Everything about this year’s private equity windfall is more important than usual:

  • The average leveraged buyout was valued at $ 2.5 billion this year, well above the 2007 average of $ 2 billion, according to S&P.
  • The average LBO debt in 2021 was 5.67 times EBITDA (a cash flow proxy), compared to 5.41 times in 2013.

So what is driving the surge? A number of factors are at play. All of them, of course, relate to the figurative bottom line. Kearney Posner, portfolio manager at Lord Abbet, told the WSJ, “Tax hikes are on the horizon and sellers want to maximize what they can do.”

For LBO specialists, a host of willing sellers is a welcome reality. At the start of the year, private equity firms had about $ 1.5 trillion in “dry powder” or capital to invest.

What to worry about? Compared to the last financial crisis, the financial system as a whole appears relatively well isolated. Investment banks are said to have about $ 130 billion in leveraged loans on their balance sheets, up from $ 480 billion in 2007 – the remainder having been earmarked for private investment firms, pension plans and companies. ‘assurance.

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