Leverage the same, but companies stronger, finds research

While some observers of the private debt market express concerns about overleverage, this is not borne out by the findings of a new white paper from Neuberger Berman.

It suggests that, in the first half of this year, leverage was around 4.5-4.75x EBITDA for mid-market first-lien senior secured loans and 6.0-7.0x EBITDA for unitranche. This level of leverage, the firm says, does not differ materially from that seen in late 2019 or early 2020.

What has changed, the white paper indicates, is the quality of companies receiving financing. In the 12 months to April 2021, nearly half (48 percent) of private equity-sponsored deals were in the buoyant information technology and healthcare sectors. During the first six months of this year, 65 percent of private equity-backed companies were predicting annual revenue growth of 10 percent or more, compared with 26 percent six years ago.

Furthermore, according to a Pitchbook study referenced by Neuberger Berman, the median enterprise value to EBITDA ratio for US buyouts went from 10.5x in 2015 to 13.2x by the fourth quarter of last year. Combined with subdued leverage, this has resulted in the lowest loan-to-value ratios seen for many years.

“In short, we believe that since 2020 we are lending to those we view as better, more highly valued companies than we were lending to four or five years ago, but with a thicker equity cushion beneath us in the capital stack, at yields of around 5.5 percent to 7.5 percent,” says the white paper.