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Part Two: Risk Mitigation in an Uncertain World
Part Two of Dan Porter’s two-part blog on the changing face of raising capital and of debt.
In addition to the historical market risks of accessing capital, the current global political and technological platform is spelling out three other primary issues which may materially constrain access to capital. These are:
(1) The rise of populism (where none existed before) in advanced and long-established democratic economies.
(2) Increased and enhanced regulatory oversight across multiple jurisdictions.
(3) How claims over national security mechanisms and related concerns are being leveraged to give the business communities of certain countries a competitive advantage over lesser (security-wise) competitive economies.
A Picture is Worth a Thousand Words
Private equity and strategic company acquisition activity over the past 6-8 years as supported by cheap and easily accessible debt has fueled a buy-out frenzy and pushed up buy-out valuations to a level not seen since years prior to 2008.
Global merger and acquisition activity are cresting at $3.3 trillion for the year ended 2018. This has been accommodated and facilitated by easily accessed debt and debt-like capital, all priced in the middle to upper middle, single-digit spectrum and with loose terms and covenant light structures
Like the pre-2008 era, debt raised to fund these high valuations leveraged acquisitions has now crept upwards relative to a multiple of the borrower’s earnings before interest, tax, depreciation and amortization (EBITDA) to routinely reflect a debt: EBITDA leverage multiple in the six times range or more. This compares to 2009-2010 when maximum leverage was cresting in the three-times level. These levels of debt leave very little if any room for margin of error when rates rise or business activity falls off or more alarmingly, if both events occur at the same time - which is more naturally the case.
A plentiful supply of cheap credit, with little if any strings attached to same, is pushing asset values higher and allowing buyers to offer more money upfront for every dollar of future profit that they expect (hope) the acquired target company will earn. Expect alarm bells may soon start to ring.
Two of the largest, most leveraged transactions announced globally for 2018 involve two Canadian companies – one a buyer and one a seller. Brookfield Asset Management is buying the U.S.-based battery division of Johnson Controls for $13.2 billion and U.S.-based Blackstone Capital is buying 55 % of Canadian-based Thomson Reuters for $17 billion.
Both buyers intend to complete these transactions using various forms of debt which in total, will exceed five to six times the annualized EBITDA of each target company – so more than $ 10-14billion of floating or re-set debt is being raised for each transaction
De-Risk and Insulate
There are a number of steps Canadian borrowers and investors can do to lessen market risk:
For more information contact Dan Porter, Managing Director, at
416.515.3877 or [email protected]
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