Rising debt redemptions in a low interest rate environment

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Private Equity (PE) firms in India are making bigger bets with borrowed money, fueling demand for acquisition finance amid low interest rates and a world awash in liquidity.

Repurchases of PE in the last year

Private equity firms use debt in addition to equity to make large acquisitions, which lowers their overall cost of capital and improves their potential returns while also allowing them to make larger acquisitions.

“Between November and March, there was a strong demand for financing acquisitions in the unlisted sector because, although listed valuations rose significantly, valuation expectations on the unlisted side were still reasonable. But after March that changed, and even on the unlisted side, developers started looking for valuation multiples comparable to their rated 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 previous acquisition finance was underwritten by banks like ours and placed in the commercial banking space in Taiwan, the EMEA region, Australia and banks in South East Asia, now, these higher leverage levels, coupled with the additional flexibilities sought by sponsors such as additional leeway, cash flow deferrals, higher operating leverage and higher subordination make commercial banks unable or unwilling to subscribe to this paper in accordance with their own risk / investment policies. As a result, the whole universe of selling these types of loans has shifted from commercial banks to credit funds and other participating institutional investors, ”he said.

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

“Although at first glance it looks like a product that is just a little different from the usual leveraged buyout and finance product in the sense that the leverage is maybe a bit more, the covenants are looser, yields are higher, the tenor is longer, etc., but the result is a product that cannot be sold in the commercial banking space, so it needs a whole new one. investor base to sell it, ”he said.


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