NEW YORK, Jan 3 (LPC) - Record financing for mergers and acquisitions as well as a push to lock in borrowing costs before interest rates headed higher drove US syndicated loan issuance to an all-time high of US$2.6trn in 2018, surpassing by 6% the prior record set a year earlier.
The high octane lending pace may be difficult to replicate in 2019, as companies assess tactics in highly volatile debt and equity markets that swept in late last year, bankers and investors said.
The new year got off to a rousing start, though, with a US$33.5bn bridge loan to support Bristol-Myers Squibb Co, rated at A2/A+/A-, in its US$74bn acquisition of Celgene Corp announced on January 3. The loan for the giant pharmaceutical company tie-up is the sixth largest US investment grade bridge commitment on record, and the second largest in the US healthcare segment, according to LPC.
Market sentiment has shifted in recent weeks due to dramatic daily stock market swings, trade war worries and emerging concerns about the state of the economy and degree of interest rate increases. But for much of 2018, confidence among both borrowers and lenders was clear.
About 68% of the total volume was for loan refinancing by borrowers front-running an ongoing rise in interest rates, matching the record share of the previous year.
Corporate mergers of highly rated names were front loaded to the first half of 2018, while a wave of jumbo leveraged buyouts took over the second half of the year, as companies sought growth through strategic tie-ups and private equity sponsors aggressively looked to deploy cash stockpiles.
Lending to back both mergers of investment grade-rated corporates and leveraged buyouts leapt 21% to a record US$648.5bn, well above the previous all-time high of US$546bn set in 2015, according to LPC.
“It has been an ideal market for leveraged loans over the past year, but there has been a massive amount of supply, dwarfing the bond market,” said Richard R. S. Smith, managing director and head of leveraged capital markets for the Americas at Mizuho.
“Now, with questions about if or when there will be a recession, tremendous global equity volatility and the unsure direction of interest rates, the institutional investor is being driven to the sidelines,” Smith said. “There continues to be demand for leveraged products, and issuers have access to the marketplace, just at a higher return to investors.”
The US$1.24trn loans syndicated to highly indebted companies carrying low credit ratings was the second highest amount ever, 12% below the record set in 2017.
Large leveraged buyout financing in the second half included the biggest one since the financial crisis, supporting Blackstone’s 55% purchase of the Financial & Risk unit of Thomson Reuters that includes LPC and was renamed Refinitiv. Loans backing Akzo Nobel’s chemical business spin-off and Envision Healthcare’s buyout by private equity firm KKR were in the same cluster.
Lending to investment grade companies set a record just above US$1trn, including about US$235bn for M&A deals that topped 2017’s record total by 16%.
High profile mergers included huge loan financings for health insurer Cigna Corp’s acquisition of pharmacy benefits manager Express Scripts Holding Co and for US cable company Comcast’s purchase of a controlling stake in British pay-TV company Sky.
“Companies are still acquisitive and will find opportunities, even if there’s more volatility,” said one banker focused on investment grade credits. “At the same time, banks still have the cash and the appetite to lend.”
While bankers remain eager to put money to work, turbulent debt and equity markets could at the least slow the pace of deal making.
“I think what will impact M&A activity is that costs simply are higher: spreads are wider and yields are higher, so financing acquisitions is more expensive,” said Todd Mahoney, head of fixed income syndicate, Americas, for UBS. “Secondly, you have a still fairly new administration, and you have less certainty from a regulatory standpoint that transactions will go through. These two factors slow down the M&A pipeline.”
Even if pricing is not expected to widen significantly for better-rated names, the outlook is also uncertain. Several large mergers have been scuttled during the Trump administration for antitrust or national security concerns, and regulatory reviews are dragging on for long periods.
In the fourth quarter, total syndicated lending of US$660bn was little changed from US$653bn in the same quarter of the previous year.
The changed market tone, which saw secondary loan prices sink in the final weeks of the year, is being closely watched by borrowers and investors.
LPC’s index of the most heavily traded leveraged loans ended the year at 94.64, having fallen swiftly from as high as 98.91 in October.
“Although there is the potential for the market to move even lower, I’m encouraged that we have a much more attractive opportunity set to choose from as we move into 2019,” said John Fraser, head of Investcorp Credit Management US. (Reporting by Lynn Adler Editing by Michelle Sierra)