Canada's biggest bank is financing and advising on the largest leveraged buyout since the financial crisis, as Royal Bank of Canada's tight relationship with Silver Lake Partners continues to pay the bills.
RBC's securities unit is one of the lenders and advisers to Silver Lake on the $24-billion (U.S.) buyout of Dell Inc. That follows on the heels of aiding Silver Lake on the purchase of European tax refund processor Global Blue last year, working on the takeover and the subsequent sale of Skype by Silver Lake and other investors, and aiding on the purchase of web domain company Go Daddy.
That long running relationship is going to provide a huge fee cheque for RBC, given the merger work and the scale of the debt placement on Dell. This deal dwarfs any of those previous assignments.
Canadian banks that have invested in the U.S. are increasingly seeing payback on transactions that have nothing to do with Canada. The result has been a surge in Canadian banks up the rankings of fees taken in by banks around the world.
Bank of Montreal's securities unit is now a much bigger player in leveraged loans, and has shown up as a key adviser to IntercontinentalExchange, which is now buying the owner of the New York Stock Exchange. RBC has made a big push on the technology, telecom and media front as part of its incursion into the U.S. investment banking space over the past decade, and leveraged loans have become a key part of the bank's business.
How much risk is RBC taking on by lending as part of the biggest private equity buyout in years? Not all that much, by the standards of mega buyouts from the pre-crisis era. The purchase multiples are low, Dell produces heaps of cash flow, more than enough to cover the roughly $1-billion a year in interest on the acquisition debt (a back-of-the-envelope calculation based on an interest rate of about 6 per cent and $15-billion of debt). And there ought to be no shortage of buyers for the debt in the syndication market, where investors are clamouring for things to buy.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)