August 16, 2018 - As we reported recently, terms have been moving somewhat in favor of lenders in the past several months. Covenant flex has favored lenders and spreads have widened. This week, LevFinInsights added that in the past three months, leverage multiples on new M&A related loans have come in half a turn – to 4.06x first lien/5.25 total – from their first quarter highs. But is the tide really turning? Perhaps not.

LFI dug deeper and determined that we weren’t seeing a shift in leverage, but rather a shift in issuing sectors.  Software businesses generally have low capex requirements and hence can lever their cash flows more. Case in point: this year’s software deals have had leverage of 4.92x first lien, 6.06x total, well above the market average. In first quarter, software deals comprised 16% of the market; since then, their market share has dropped to 5.5%.  Thus, the recent decline in leverage may derive more from more sector changes than secular changes.