NEW YORK, Sept 28 (LPC) - US syndicated lending is breaking records so far this year, even after a summer lull, as the voracious appetite by banks and investors to put money to work resumed after Labor Day.
The US$1.9trn of loans issued in the first nine months to finance mergers and acquisitions (M&A), leveraged buyouts, dividends and for debt refinancing topped US$1.85trn in the same period last year by 3%, setting an all-time high for any nine-month period, according to LPC.
The push to seal deals before interest rates head higher, and while investor demand remains insatiable, is offsetting the hesitancy caused by tariffs, trade wars and other political risks, bankers and attorneys said.
“If you look at the market itself, it’s not likely to get any better for M&A, certainly with respect to the way we think of financing and rates and probably valuations,” said Marc-Anthony Hourihan, co-head of Americas M&A at UBS.
Total M&A lending, at about US$457bn in the first three quarters of this year, is up about 11% from US$410.4bn a year earlier, LPC data show.
“Announcing a deal that’s transformative or large when there is the potential for market volatility - a trade war, or November elections, or the President just tweets something - it makes people a little uncomfortable about announcing a deal in an environment of potential unknowns, but it shouldn’t totally dissuade it,” Hourihan said.
Topping deals by highly indebted companies in the third quarter was the largest leveraged buyout funding since the financial crisis, backing Blackstone’s 55% purchase of the Financial & Risk unit of Thomson Reuters that includes LPC and is being renamed Refinitiv.
Ardent demand for Refinitiv’s US$13.5bn loan and bond package, as well as for large leveraged loan deals for Akzo Nobel’s chemical business spin-off and Envision Healthcare’s buyout by private equity firm KKR, reignited a market for borrower-friendly terms.
Borrowers are generally in the driver’s seat, especially as investors ramp up exposure to floating-rate loan assets to hedge rising interest rates.
The US Federal Reserve raised rates on September 26 for the third time this year, and said it expects to hike rates again in December as well as three more times next year and once again in 2020.
“There is just so much capital available that has to be put to work and investors are willing to buy credits with more borrower-favorable collateral or covenant protections in order to achieve their returns,” said Ellen Snare, a partner at King & Spalding. “I don’t see the inflow of capital slowing down.”
Companies are cognizant that the loan market is wide open to them, at least for now, bankers and attorneys agree.
“People are nervous that the good times can’t last too much longer - we’re into the longest-running period without a recessionary force,” said Snare. “The market may not be as borrower friendly a year or 18 months from now as it is today.”
The summer was spent on relative hiatus after a mega deal influx earlier in the year, navigating escalating trade wars and prepping the next round of deals that starting tapping the market after Labor Day.
“We saw a rash of M&A in the first half of the year, and we saw the market digesting all of that before it slowed down in the summer months,” said Ted Swimmer, head of corporate finance and capital markets at Citizens Bank. “It seems that M&A is now back in the dialogue as a way for companies to grow.”
In the third quarter, total US syndicated loan volume of US$432bn was about 20% below the US$539bn tallied in the same quarter last year.
Lending to high-grade companies was about 21% higher from a year earlier at US$713bn, front loaded by deals in the first half. Lending to lower-rated borrowers, however, was down around 12% at roughly US$930bn, as the torrid pace of refinancing dropped. Bankers are optimistic that lending will escalate into year-end.
News this month that Cigna Corp’s U$52bn acquisition of pharmacy benefits manager Express Scripts Holding Co, and retail pharmacy CVS Health Corp’s US$69bn acquisition of health insurer Aetna Inc are on track to be completed is encouraging for large tie-ups, bankers said, after a few huge deals were scuttled this year by antitrust or national security concerns.
“When you see as much money as we do on the sponsors’ books there’s a definite need to put that cash to work, and you have financing markets both on the leveraged and investment-grade sides, that are conducive for M&A to pick up,” Swimmer said. (Reporting by Lynn Adler Editing By Michelle Sierra and Jon Methven)