GS Americas Credit Finance Group Co-Heads on Leveraged Loans, M&A

May.07 — Goldman Sachs Americas Credit Finance Group Co-Heads Christina¬†Minnis¬†and Vivek Bantwal discuss the leveraged loans market and the outlook for merger and acquisitions. They speak on “Bloomberg Markets: European Close.”

I feel like we could have had more fun having this conversation in december with with everything they have and anything but let’s run our let’s talk about them now the feds yesterday warning that you know there is some new risk in the credit markets a lot of the high-risk borrowers seem to be the ones taking on new leveraged loans is that something we should be

Concerned about well first of all i want to say thank you for being here this is our fourth annual leveraged finance conference for the firm and we’ve got over 800 shoes and investors and we’re pretty excited to have folks up 13% in terms of attendance on your question there’s a lot of talk about that in fact one of the panel’s i was just on with a head of loan

Sales or loan portfolio management for pemko raised this point and the thing to think about is well yes borrowing is up and particularly the leveraged loan market is higher that is the most secure part of a capital structure and so if you think about credit risk senior secured is where you probably want to live coming on this because one of the things that’s driven

This of course has been the sort of lack of regulation or at least the winding down of some of the regulation again like is that something that is causing more risk to come into the market and perhaps more unchecked risk well sure it’s a fair point the market has evolved and so you know on the one hand leverage has you know sort of crept up over the last ten years it

Is and so on the one hand leverages crept up and you know cuff light has become you know sort of market standard and so there’s less covenants on the other hand the equity check as a percentage of enterprise value is actually still quite robust it’s in the low 40s on average is obviously a variation around that and some deals get done much more aggressively but but

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Equity is a bigger portion of the capital searcher than it used to be particularly no six no seven and then second coverage ratios are more robust to your point about regulation so the leverage lending guidelines has had the add the effect of pushing some of the most levered deals call it that top quintile of lover’ deals those deals that are you know seven seven

And a half times and higher out of the regulated banking kind of broadly syndicated market into direct lenders and so that the direct lending community which was you know very small part of the market five years ago is now call it 20% of the market right and holding steady so christina let me ask on that if if we’re seeing this sort of robust direct lending market

And it’s also becoming more diversified right it’s not just one kind of alternative credit they set up to actually deal with any kind of downturn or any sort of squeeze in the credit market like i worry that maybe the liquidity is just not there if we do go into a down cycle well they have long-term capital so that’s a positive they do take on very large positions

And so it’ll be very interesting to see from a little quiddity perspective if there is a downturn if they have the desire and the stomach to hold their positions and particularly if they’ve bought into some of the less liquid names will it be a market made for them so we’re gonna watch it very carefully a number of the accounts ask that question repeatedly of our

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Firm so it’s something to very much keep an eye on okay and one of the biggest if you like leverage requirements of recent times or at least one of the most high profile has been 3g we’ve seen a kind of philosophical implosion of their model in recent times what does something like that mean more generally for the leverage requires when they’re looking to go out

And do m&a i think you know capital has been very available and certainly cost of capital has been very low and so you know i think you know corporate clients in particular may function is a bit of a hybrid they maximize their cost of capital with the most cheap forms of capital and so i think and i pushed leverage very high i don’t think it really affects the

Leverage finance you know single beat part of the market is much because they tend to play in and more of that the higher double beat but they’re doing very large transactions and i think we have to keep an eye on kind of all sector segments of the market and the very large transactions are coming from where because pe we know has sort of struggled in its market

At least to do traditional lbos they’ve been smaller deals carve outs so where is that flow coming from where is it likely to continue to come from yeah it’s a fair point so to your point so far a year today we’ve not seen as many bigger deals announced and some of the big deals that have gotten done where deals that were signed up into third and fourth quarter of

Last year and so we’re not seeing a lot of activity yet on the big deals now part of that is as you started the interview in december we had a slowdown and so when you have a slowdown like that in the market dialogue slows down and so we are starting to see a return to the smaller deal so those you know billion dollar and smaller deals are very very active right

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Now in fact more active than last year i’d say one to five billion dollar deals there’s still a bunch of activity on those bigger deals though yet that’s taking a little bit longer to come back i would say with the amount of a private equity raised you know last year was significant over 800 billion there’s a lot of dry powder sitting in those coffers they are

Very much poised to start looking at larger transactions we haven’t seen that yet but we have an anticipation that we’ll see more of that okay let’s just wrap on this there is this concern in the market perhaps just the fight that you have a lot of triple-b credits out there some extremely large i think a forward with about 150 billion dollars of debt for instance

If we do go into a period of contraction and you see some of those slip down into high-yield it’s the market actually there to absorb them i think what we watch very carefully if that happened to occur for example in the month of december with what macros what we were dealing with the technicals there that would have a pretty profound impact but if it happens over

Time i don’t think we’re too too concerned about it do you think yeah i agree with that i think you probably need two things to happen that plus some other event that would cause a market like the some of those things i think would be a bigger issue than just the downwards by themselves

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GS Americas Credit Finance Group Co-Heads on Leveraged Loans, M&A By Bloomberg Markets and Finance