The impact of rising interest rates on Leveraged Buy-Out (LBO) transactions is having a great impact, particularly in the Large Cap segment.
In recent years, and particularly in 2021, the Leveraged Buy-Out has been the most popular form of company takeover. It consists of using bank debt to finance a part of the transaction. The debt is gradually repaid thanks to the cash flow generated by the acquired company.
However, since the rise in interest rates in 2022, LBO deals have been disrupted, with the following implications:
- Investors are adopting a wait-and-see attitude, due to the significant slowdown in deal financing;
- Banks are reluctant to grant LBO loans because of the increased risk of default;
- Difficulty in repaying LBO debt due to lower profitability in certain sectors;
- Mechanical decline in investors’ IRR.
In the coming months/years, there will also be difficulties in refinancing certain LBO debts.
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