Investment grade market was liquid, stable and muted in 2019

New York

ISSUANCE in the investment grade loan market was strong this year, though slightly down from 2018, supported by jumbo merger and acquisition (M&A) transactions, as the market proved its capacity to continue to fund big-ticket companies.

Companies took advantage of a healthy appetite from banks to repay debt, lightening their balance sheets, which was a boon for credit ratings.

With those trends as a backdrop, lenders in the investment grade loan market are preparing for what they believe could be a busy first quarter for M&A. The upcoming year is expected to engender the right economic and financial climate for new-issue activity, as the economy remains stable and banks continue to have strong liquidity and demand for deals.

Resolution of geopolitical events such as Brexit and the trade wars may bring in some corporate consolidation, as businesses seek to pull the trigger on transactions that have stalled amid uncertainty.

Year-to-date high-grade volume including M&A and refinancings was US$874.48 billion, while the same year-to-date figure in 2018 was US$944.56 billion.

With M&A volume this year through November totalling US$193.42 billion, activity was boosted by big deals in healthcare and technology, where companies had room to make logical combinations happen in a supportive capital markets environment. Investment grade healthcare loan issuance was 44 per cent ahead of year-ago levels at US$124 billion.

"Within jumbo M&A, market receptivity to bridge loans, term loans and bond financing has been very positive and more than adequate," said Anish Shah, global head of investment grade acquisition finance at Morgan Stanley.

Though October and November total investment grade loan volume of US$118 billion lags fourth-quarter 2018 levels of US$295 billion, the year is expected to end on a high note with a healthy amount of both new money deals and refinancings.

By smartly combining bank liquidity and strategic lender relationships with full-service advisory services, investment banks continued to gain ground in the investment grade lending space.

The joint venture between Morgan Stanley and MUFG paved the way for titan-sized bridge loans that competitors found hard to replicate. In January, the two banks provided a US$33.5 billion bridge loan to support drugmaker Bristol-Myers Squibb Co's US$74 billion purchase of biopharmaceutical company Celgene Corp. Five months later, in June, Morgan Stanley and MUFG scored again with a fully underwritten US$38 billion 364-day bridge loan backing US biopharmaceutical company AbbVie Inc's US$63 billion acquisition of Botox-maker Allergan plc.

Deleveraging defined 2019 and will likely continue to be a talking point in 2020. "Companies that put on a lot of leverage demonstrated their ability to repay," Mr Shah said. "The more highly leveraged balance sheets are taking a little bit of pause and selling assets or using free cash flow to repay debt, and that's a real positive."

Some investment grade names reaped the benefits of the 2018 corporate tax reform, which increased the liquidity in the market and lowered financing needs.

Political uncertainty on market-moving events like the trade war and uncertainty around Brexit impacted corporate confidence and could have delayed some deals in the pipeline, especially in the last quarter of the year.

Relationship lending remains strong for investment grade issuers and 2019 was a clear example that stability for those borrowers will continue in the foreseeable future. REUTERS