Spike in leveraged buyouts amid low interest rates

MUMBAI: Private equity (PE) firms in India are making larger bets with borrowed money, stoking demand for acquisition financing amid low-interest rates and a world awash with cash.

PE firms use debt in addition to equity capital to make large acquisitions, reducing their overall cost of capital and improving their potential returns while also allowing them to make larger acquisitions.

“Between November to March, there was a lot of demand for acquisition financing in the unlisted space because while listed valuations had run up significantly, valuation expectations on the unlisted side were still reasonable. But, after March, that changed, and even on the unlisted side, promoters started seeking valuation multiples comparable to listed peers,” said Shantanu Sahai, managing director and head of debt at Nomura.

According to Sahai, this trend has resulted in a significant shift in the debt market.

“While earlier acquisition financing was underwritten by banks like us and placed in the commercial bank space in Taiwan, EMEA, Australian and Southeast Asian banks, now, these higher levels of leverage, coupled with additional flexibilities sought by sponsors such as incremental covenant headroom’s, cash flow deferrals, higher operating leverage headroom’s and higher subordination render commercial banks unable or unwilling to subscribe to this paper per their own risk/ investment policies. Hence, the entire selling universe of such types of loans has shifted from commercial banks to credit funds and other institutional investor participants,” he said.

This is a new product on the block called “unitranche”, and currently, very few banks are servicing this need of the market, Sahai said.

“While on the face of it, this looks like a product that is just a little bit different from the usual acquisition and leveraged finance product in the sense that maybe the leverage is a little more, covenants are looser, yields are higher, the tenor is longer, etc., but the consequence of that is a product that is not capable of being sold in the commercial bank space. So, it needs a whole new investor base to sell it,” he said.