Growing loan pipeline suggests post-Labor Day M&A

[NEW YORK] A growing pipeline of deals buoyed by rising chief executive confidence, a stronger consensus about interest rate hikes and an abundance of available capital point to a post-Labor Day pickup in M&A-related leveraged loan issuance, according to bankers.

If borrowers were wary in the first half of the year, opting to hold off on acquisitions given an uncertain rate outlook and a series of market shocks that sent volatility rippling through the financial markets, looking ahead there is more clarity on the rest of the year and into 2017, in particular with respect to where the Federal Reserve will be over the next 6-9 months.

The technology sector, and the technology, media and telecommunications area more broadly, as well as the pharmaceuticals sector, are likely to lead the way on M&A. "CEO confidence is high, which is the number one factor in getting M&A deals off the ground," said Jim Kuster, managing director and head of corporate M&A at Citizens Bank.

M&A volume probably will not exceed 2015 totals, but the second half should be improving. The availability of capital is quite strong and the capital markets are very liquid, added Kuster.

Robust investor demand that enabled issuers to nab highly favorable terms this summer should encourage borrowers to go to market with confidence after the first half proved a bumpy ride beginning last December when the Federal Reserve increased interest rates for the first time in nearly 10 years.

Just as the market was bouncing back, the UK surprised the world by voting to leave the European Union, which brought a return of uncertainty and sent markets downward. However, the decision tempered investor fears of a rapid increase in interest rates, bankers said.

Now bankers are hoping for a boost in volume, as the third quarter is looking lackluster about halfway through, posting just US$18.7bn of leveraged M&A volume, according to Thomson Reuters LPC data. The third quarter of last year saw US$118.7bn of volume.

Leveraged M&A volume during the second quarter of 2016 totaled US$76.2bn, which was in line with the US$76.9bn seen last year.

The sell side is optimistic, and lenders are reporting more activity than usual in August, which is typically a quiet stretch for bankers ahead of summer's end. "We've never been this busy in August," said one banker who works primarily on middle market sponsored deals. "We've never seen so much LBO activity in summer, and it bodes really well for the rest of the year." This summer marked a refinancing bonanza. Borrowers flocked to the leveraged loan market to slash borrowing costs. An extended period of lower rates is likely to draw more issuers to the loan market to take advantage of favorable interest rates, but could also attract strategics looking to bolster growth through add-on acquisitions.

REUTERS