Lehman reckons that $76 billion LBO backlog will translate into $45-$55 billion of 2008 issuance

By Paul A. Harris

St. Louis, Jan. 2 - The Lehman Brothers high-yield capital markets team estimates the present size of the high-yield leveraged buyout backlog to be $75.9 billion and expects that backlog to translate into $45 billion to $55 billion of 2008 issuance, according to a report published on Wednesday.

"This overhang will likely stem any real rallies that might otherwise occur as we start 2008, as underwriters will use any market strength to unload paper," the team states.

Apart from the backlog of funded and unfunded LBO deals, Lehman anticipates $100 billion to $115 billion of corporate new issuance, which would result in a total of $150 billion to $160 billion of global new issuance for 2008, according to the report.

Although the high-yield capital markets team sees corporate buyers becoming more active relative to financial sponsors, large stockpiles of cash should keep the sponsors off of the sidelines in the year ahead. However supersized LBO deals are not likely to reappear until the market works down that $75.9 billion backlog.

"We anticipate $15-$20 billion in new LBO issuance [in 2008], roughly a 60-70% decline from 2007," the team states.

"That being said, the vast majority of the backlog, over 75%, consists of funded and pending LBO transactions, which could make LBO paper the most common issuance in 2008, despite macro trends that suggest otherwise."

The LBO backlog is also likely to slow an improvement in credit quality, according to the report.

Asserting that double-B rated bonds comprised only 16.5% of 2007 issuance while triple-C paper represented 66.9%, Lehman expects that because of the backlog, lower rated deals will continue to make up a disproportionate share of the new issue market in 2008 as the dealers continue to work through the backlog.

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