Report: Subordinated falls out of favor

With cheap, senior debt financing available to many private equity sponsors, use of subordinated debt has fallen out of favour, according to a report released by research firm Pitchbook on Tuesday.

“Favourable credit markets have spurred more debt financing recently, much of it in the form of senior debt,” according to the report. “A smaller percentage of debt is going toward non-senior debt like mezzanine or high-yield bonds. As the credit spigots have opened up, senior debt, which is cheaper and more abundant, has proved more alluring to PE sponsors.”

Average subordinated debt levels for private equity deals peaked at roughly 35 percent during the first quarter of 2012. That average has since fallen to around 10 percent through the first quarter of 2014, which marked the third straight quarterly decline for that form of financing.

The trend may reverse itself once interest rates begin to tick upwards, an event that many market sources consider inevitable as the US Federal Reserve reverses crisis-era monetary policies that held rates at historic lows.  

The report also detailed a steep decline in the median debt percentage for global private equity deals, which fell from 63 percent in Q4 to 55 percent in Q1. Falling median debt percentages coincided with a spike in the average use of equity across private equity deals. Average use of equity crossed the 50 percent threshold for the first time “in several quarters”, according to the report.