Middle Market Leveraged Finance – January 2022

Middle Market Loan Volume Increases Substantially, Leverage Remains Elevated

Capstone Partners released its January 2022 Middle Market Leveraged Finance Report, providing key statistics and analysis on middle market credit dynamics, pricing trends, and valuations.

Annual middle market (MM) loan volume through year-end increased substantially, year-over-year, as the broader global economy continues to rebound from the COVID-19 pandemic. LBO (33% of total volume) and acquisition (31%) transactions have greatly increased as Biden’s tax policy has pulled 2022 M&A deals forward into 2021. Refinancing activity (25%) remained strong throughout 2021 as rates are nearing historic lows and competitive processes for strong private equity sponsored transactions continue to push volume forward. Corporate purposes and mergers (~1%) account for the remaining balance.

As of December 2021, Total Debt/EBITDA multiples for larger loans remained steady at 5.5x, the highest recorded level since 2018. A robust M&A environment and a continued supply/demand imbalance for middle market transactions caused lenders to increase available leverage in order to win deals. Equity contributions of ~45% are still required in most cases; however, elevated purchase multiples and excess dry powder with lenders and sponsors have driven leverage multiples higher.

Also included in this report:

  • Why market participants have increasingly adopted a unitranche debt structure.
  • Capstones’ expectation for the direction of yields moving into 2022.
  • Historic data on the average size of private debt funds through the first half of 2021.
  • How lenders are increasingly incorporating environmental, social, and governance (ESG) investing principles into their approach to debt issuance.

Insights for Middle Market Leaders

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