Tags: Fed | LBO | market | revive

BofA Strategists: Fed Easing Will Revive LBO Market

By Dan Weil   |   Wednesday, 07 Nov 2012 10:53 AM

The Federal Reserve’s quantitative easing (QE) program might bring on a new wave of leveraged buyouts (LBOs), which were popular during the 1980s and 1990s, according to a new Bank of America Merrill Lynch report.

The study, written by BofA credit strategists Hans Mikkelsen and Yuriy Shchuchinov and obtained by Business Insider, says that conditions have turned "unusually conductive for leveraging transactions for this stage in the typical cycle."

That means investors “should be concerned about more extreme releveraging in the form of leveraged buyouts," the duo writes.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

QE reduces interest rates for borrowers, such as buyout artists. And reduced rates lead banks to take their capital from low-yield bonds and put it into higher-yielding assets, such as LBO loans, according to the report.

The BofA analysts think deals will start small, generally less than $5 billion, with a few hitting $10 billion.

“However, in an era of historically low yields and abundant liquidity in the public markets, with banks having finally rebuilt capital, we think we have the ingredients in place for even larger deals, up to $20 billion,” Mikkelsen and Shchuchinov write.

Buyout firms apparently have plenty of firepower to pull off LBOs. They had more than $1 trillion of committed capital that hadn’t yet been invested at the end of 2011, according to research firm Preqin.

Global mergers and acquisitions fell to $466 billion in the third quarter, their lowest level since the end of the financial crisis, according to Bloomberg.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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