Could high-yield be next? The subprime meltdown roiling corners of the credit market has yet to infect high-yield bonds. True, spreads widened. The JPMorgan global high-yield index has risen from 279 to 323 basis points over Treasuries during the past two weeks. But that is more of a blip than a blow-out by high-yield standards. Previous liquidity crunches have seen spreads balloon to 800 or 1,000bp.

What does it mean for financial sponsors mulling the next huge buy-out or bankers marketing an agreed deal? The increase in financing costs – assuming spreads do not merely re-tighten – is hardly welcome, but at these levels, eminently manageable. For one thing, the bond market is only one piece of the financing structure. Though it has grown in depth and liquidity, it has yet to finance more than a few billion dollars worth of bonds in any one deal. Second, there is far, far more at stake. Financial sponsors hoping to double the equity they have invested are thinking in the billions. A 50bp uptick in financing a $5bn bond deal barely registers by comparison.

So far, so good. But that is not the end of the story. To the extent that last week’s turmoil suggests – or presages – greater risk aversion, then financial sponsors will have to take note. The economics of their high-wire acts are driven by how much leverage they can pile on to companies. If they suddenly find that deals at six times earnings before interest, tax, depreciation and amortisation are no longer flavour of the month, and that they have to ratchet down the debt multiples, this would represent a far more significant threat to their heavy deal flow than the odd hiccup in the bond market.

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