Advent/Maxar: when LBO loses its leverage

Leveraged buyouts carry a lot less leverage these days. Rising interest rates have cast a big chill over the debt market. Private equity firms that rely on leveraged loans to fund takeovers now struggle to find banks that will commit to financing on attractive terms.

As a result, an industry notorious for its use of debt to boost returns has changed tactics. Some are pulling bids. Others such as Advent International are stumping up more equity to get deals done. Advent on Friday agreed to buy satellite owner and operator Maxar Technologies for $6.4bn, including debt.

Advent’s $53-a-share cash offer values Maxar’s equity at $4bn. Yet it is putting $3.1bn of equity into the transaction. Another investor, British Columbia Investment Management Corporation, will contribute an additional $1bn of equity.

Making big equity investments in a single company can be perversely a risky strategy. Without leverage, delivering the kind of double-digit returns PE investors are used to gets harder. Moreover, Advent is hardly snagging a bargain. The war in Ukraine has made defence-related stocks a hot sector. Advent has offered a 137 per cent premium over Maxar’s three- month average share price.

Advent can always replace some of its equity with debt at a later date. But it may have to wait awhile. In the first nine months of 2022, only $70.6bn in leveraged loans were issued for buyouts, a 44 per cent decline from last year, according to Leveraged Commentary & Data.

Banks have little appetite to fund leveraged buyouts. Many nurse big losses on loans agreed for buyouts, such as Citrix Systems and Twitter, but that they subsequently struggled to offload.

Consider that yields on new LBO issues have more than doubled to 9.6 per cent this year. The private credit market, which bypasses banks and the junk bond market, offers another option. But these loans are also expensive. Private equity cannot rely on cheap debt to juice returns. More bad news for deal flow.