February 13, 2020 - An eternal question is “How do the current crop of leveraged loans compare to the 2007 vintage?” Today we have an answer.  Covenant Review recently compared recent jumbo LBOs to their pre-crisis counterparts. So how does last year’s cohort look?  Smaller, more equitized, theoretically less levered (more on that later) and definitely more flexible.

Specifically, CR looks at the 12 largest LBOs in a given year and compares all sorts of metrics. Here’s the top line: Today’s jumbo LBOs are much less jumbo, averaging $5.4 billion in 2019 vs. $13 billion in 2007 and there’s a lot more equity today (45% vs. 24%). In theory, these deals are less leveraged. Looking at pro forma net leverage, 2007 first lien leverage rang in at 4.8x, while total leverage totaled 7.9x. With the demise of subordinated debt, today’s pro forma net first lien leverage remains quite high in 2019 (4.3x), while total net leverage appears lower (5.8x). But then there’s that whole EBITDA adjustment thing. As anyone in the market knows, EBITDA adjustments are well up, averaging 33% in 2019 vs. 13% in 2007. In turn, it may be hard to say which deals actually are more leveraged. Of course, with high purchase price multiples and large equity contributions, sponsors seek optionality. And optionality they find, CR notes. Jumbo LBOs are universally covenant lite today, while just 25% were in 2007. Deeper into the documentation weeds, CR’s legal eagles note that today there is more potential collateral leakage to non-loan parties, more expansive EBITDA adjustments (per above), more grower baskets, expanded reclassification provisions and incurrence-based carve-outs.