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* High-yield supply could dip 10% without M&A pick-up
* Refinancings to slow as rates rise, maturities pushed out
* Booming IPO market could also cap bond supply
By Natalie Harrison
NEW YORK, Dec 6 (IFR) - Leveraged finance bankers areheading into 2014 with the same old nagging doubts about whetherM&A will finally pick up, but this time round there is an evengreater desire for a resurgence as refinancing opportunitiesfade.
US high-yield volume is running at USD331bn so far thisyear, close to last year's record high of USD336bn, according toThomson Reuters data, with more than half of that driven bycompanies issuing new bonds at historically low yields to paydown more expensive debt.
But with interest rates on the rise, the incentive forcompanies to refinance is becoming less obvious, while theurgency to do so has also diminished as a vast swathe of debtmaturities have been pushed out to 2017, according to Moody's.
To maintain the same kind of momentum in the market and tokeep fees flying in, M&A and leveraged buyout activity has tomake a comeback.
"M&A is always the most interesting thing to talk about. Itshows how companies and investors are looking at the world, andit's how banks make money," said one senior leveraged financebanker.
But acquisition financing has accounted for just 22%-24% ofhigh-yield supply over the last three years, according toGoldman Sachs data.
"The question is how much of the decline in refinancings isoffset by increases in M&A driven financings, bothcorporate-to-corporate deals and leveraged buyouts," said MarcWarm, head of US high-yield capital markets at Credit Suisse.
DRY POWDER
A number of factors may hinder a revival, including therally in equities. Buoyant financial markets may be good forinvestment bank fees overall, but if sponsors sway towards IPOsrather than sales, then high-yield bond supply may slow untilthat capital gets recycled in new deals.
Rising rates may also make leveraged loans a more attractivesubstitute for high-yield bonds, which have the additionalcaveats of punitive call costs for financial sponsors.
One factor buoying hopes of an LBO revival, though, is theamount of cash stashed in private equity hands.
Sixty-seven US-focused buyout funds have raised USD67.3bnthis year, according to private equity data group Preqin,marking a 40% increase on last year and the highest total since2008.
"There is a tremendous amount of dry powder at the sponsorswhich should lead to increased buyout activity, but the strengthof the IPO market and valuation discipline amongst the sponsorshas resulted in less LBO volume than we would otherwise expect,"said Warm.
Lawyers are certainly busy, particularly on possiblemid-sized leveraged buyouts.
"Volume has picked up, with several auctions under way wherewe have been contacted in relation to the financing," saidRobert Treuhold, a capital markets partner at Shearman &Sterling.
The retail sector could shape up to be reasonably active,with private equity firm Sycamore looking to broaden its reachfollowing its purchase of Hot Topic and Torrid.
It is advanced talks to acquire the off-price chain storeK&G of Men's Wearhouse Inc as well as Jones Group Inc.
"The pace of discussions that we are having has picked up,and there are a numbers of financial sponsors that are thinkingabout doing something," said one senior leveraged financebanker.
THE BIG GUNS
What everyone really wants to see, however, are the jumboLBOs that require USD10-billion plus debt packages, like thekind seen for Dell this year.
There are some big bond deals heading the market's way inJanuary, specifically to fund Community Health's USD3.9bn acquisition of Health Management Associates.
But other than a potential buyout of Time Warner Cable and possibly Vodafone, the cupboard for thosetypes of deals looks fairly bare.
AT&T has been scouting for targets, with Vodafone seen asthe most attractive once its deal to sell out of Verizon is completed in the new year.
And speculation has been building for weeks that CharterCommunications will bid for TWC, while other suitorsincluding Comcast and Cox have also been thrown into the mix.
Some bankers say that the debt financing would likely exceedthe USD13.75bn debt that backed Dell. There's certainly noproblem raising that amount of debt as Dell, and others, haveproved.
Aside from big corporate deals, however, there remains thesame problem of raising equity for large buyouts as financialsponsors shy away from club deals.
"With large deals, it's the equity that is the problem, it'snever the debt," said the banker.
Another leveraged finance banker said that activity waslikely to be driven by strategic acquisitions betweencorporates, than jumbo LBOs.
One thing is certain: terms could get aggressive as bankscircle fewer deals.
Currently it's normal to see six or seven banks competingfor each LBO. And with less product floating around, investorsmay be tempted to buy riskier, more leveraged debt.
Leverage has generally been in the five to six timesmultiple range this year.
"Leverage has not gone to crazy levels, and for now theredefinitely seems to be a cap on how far people will pushthings," said the first banker.
