KKR announced Wednesday that Q4 2011 net income rose 39 per cent to $714.6m from $515.3 m in Q4 2010. This nudged us into thinking back to 2007:
In a note out on Tuesday, Citi analysts reckon we’re due for a rerun of the heady LBO days.
The estimated $2trn of cash on S&P 500 balance sheets and $500bn in private equity has to go somewhere (like jobs? — Ed.).
Add to this the backlog of pre-crisis PE deals looking for IPOs and the Citi analysts reckon we’re due for a spike in LBO speculation and deals. As FT Alphaville has worried about reported on, demand for leveraged loans and high yield paper continues to rise, too.
So, back to the future?
Not quite; there isn’t of course the same amount of leverage around and megadeals will be rarer, Citi says. The analysts predict these differentiating factors:
– Much of the 2006 / 2007 demand was driven by the CLO machine that had a huge appetite for paper, multiplied by the use of leverage. The CLO business is now a shadow of its former self (Figure 9), and while appetite for new levered transactions is there, it is for smaller bites.
– Although we expect to see the return of megadeals, the majority will be under $7bn.
– In terms of covenants, we are seeing the reemergence of covenant–lite deals, and expect this trend to continue.
– We estimate that equity contributions from sponsors will be acceptable at around 30% (hopefully higher).
– We expect most deals to emerge with a single-B rating.
Potential targets are said to be those with: market caps of less than $15bn, Ebitda less than 8.0x and the ability to generate positive FCF. And those that ‘operate a business model that would allow for a leveraging transaction.’ (Aye.)
Which, according to the analysts, gives us: