Actionable Ideas for Companies and Sponsors

Using Preferred Equity to Achieve Incremental Leverage in LBOs

The strength of the financing market for leveraged buyouts has pushed leverage to extremely high levels. As the traditional leverage loan and high yield bond markets limit leverage, sponsors have looked for additional financing in the form of preferred equity. This preferred equity generally does not pay cash interest, but rather is payment-in-kind, or, in other words with more preferred equity. If structured correctly, this is a ratings neutral financing source that can provide additional leverage when acquiring companies for large acquisition multiples. We have recently seen large preferred equity tranches in Avantor’s acquisition of VWR Corp and Temasek’s LBO of Global Healthcare Exchange (GHX).