Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Are the big banks back when it comes to financing private equity's riskiest bets? 

The $1.6 billion leveraged buyout of Barracuda Networks Inc. by Thoma Bravo LLC suggests the answer is yes. The deal, announced Monday, involves a take-private of the Campbell, California-based provider of cloud-based security and data solutions. Financing is being provided by the trio of Goldman Sachs Group Inc., Credit Suisse Group AG and UBS AG.

It's a more recognizable group than the cohort that showed up to finance Thoma Bravo's biggest buyout last year. Lenders on that transaction -- the $3 billion takeover of Qlik Technologies -- included Ares Capital, Golub Capital and TPG Specialty Lending. These firms and other alternative lenders such as Jefferies Group LLC, Macquarie Group Ltd. and KKR Capital Markets were able to win leading roles in such deals because traditional banks were held back by regulatory guidance that called for restrictions on leveraged lending seen as risky. Now, with that guidance itself being called into question, banks like Goldman are ready to take back or lay claim to new market share.  

Pile it On
The amount of debt used in buyouts is once again rising. Leveraged lending guidance instituted by regulators in 2013 did little to curb issuance.
Source: Moody's via Thomson Reuters

Under the guidance, regulators had generally frowned upon lenders assisting companies seeking to borrow more than 6 times their earnings before interest, taxes, depreciation and amortization. But this month, the acting comptroller of the currency signaled a softening in this stance when he stated that the guidance was just that, and "shouldn't be binding on anyone." Further, the Government Accountability Office's ruling means it must be passed by Congress to be enforceable -- and with Republicans in charge, that seems less likely to happen.

Cough It Up
As a result of heightened valuations and the leveraged lending guidance, the equity portion of buyouts has climbed in recent years and is well above pre-crisis lows.
Source: LCD, an offering of S&P Global Market Intelligence
*YTD figure as at 10/31

Thus, with the Barracuda deal, we see Goldman and the others back in business. It's unclear what the debt package will be, but assuming the equity check is 40 percent (in line with the current industry norm), roughly $760 million in borrowings are required which equates to 9.1 times the company's Ebitda. (For comparison purposes, the $1.075 billion debt package for the Qlik deal represented 10.4 times the company's projected 2017 Ebitda of $103.7 million.) 

Back to the Future?
A repeal or retraction of the leveraged lending guidance will likely dent market share gains by alternative lenders. Banks attempting to stake new ground, like Goldman, may be rewarded.
Source: Bloomberg
*Encompasses entire leveraged loan market; not just buyout-related borrowings ^In 2017, this group posted its biggest haul yet. Jefferies, KKR, Macquarie, Nomura and Antares Capital are all in the top 25.

The re-emergence of big banks in the financing group for the Barracuda buyout shows that the heyday for non-bank lenders may indeed have passed, at least in relation to big-ticket deals. Remember, those lenders are rarely the first port-of-call for buyout firms because their borrowing costs are so much higher than that of traditional lenders and they're often swiftly replaced by banks as soon as feasible. Case in point? Earlier this year after Qlik's projected cost cuts had been made and its earnings had begun to grow, the company turned to Morgan Stanley and Goldman to refinance its debt at a discount of almost 5 percent to its earlier rate.

Less regulation in the area of leveraged finance will benefit banks including Goldman, which is attempting to bolster lending and related activities while trading revenue lags. But the Lloyd Blankfein-led bank won't be alone in chasing these fees.  

If the Barracuda buyout sails through without regulatory criticism and assurance emerges that no penalties will arise from partaking in such deals, you can bet the big lenders won't stop here.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Already, Treasury recommendations this summer suggested that the guidance needed to be refined, giving some bankerse hope that regulators would take a laxer approach to implementing the guidance.

  2. To be sure, the business of leveraged lending may be compromised if private equity firms are dissuaded from pursuing leveraged buyouts because of tax-law changes that place limits on interest deductibility. In this scenario, proposed changes to the tax law would mean Barracuda's annual interest expense exceeds the deductibility limit. It's unclear if existing debt will be grandfathered. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net