State of the Loan Market (Last of a Series)

In what was the highest price ever paid for a painting, Leonardo da Vinci’s “Salvator Mundi” sold last week for $450.3 million at a Christie’s auction, beating by a wide margin the $179 million forked over two years ago for Picasso’s “Les Femmes d’Alger.”

The price tag also topped the entire building cost of New York’s new Whitney Museum ($422 million). The satirical newspaper, The Onion, weighed in with a headline: “Buyer of $450 million Da Vinci Painting Sort of Assumed it Would Come with Frame.”

Loan buyers in the leveraged market must have similar feelings of being short-changed this year. As yields have compressed and leverage crept up, investors are scouring the current pipeline for value. That search is complicated by loan structures weakening with a broad brush.

At the heart of this erosion is the definition of ebitda. As we’ve discussed at length in this space, sponsors are stretching cash flows to include various add-backs and pro forma adjustments to justify higher purchase price multiples. As our Chart of the Week highlights, those multiples are heading towards 11x on average for the overall market.