NEW YORK, Nov 9 (LPC) - The US syndicated loan market is optimistic that it can maintain its record-breaking pace of lending despite looming political deadlock in Washington after the Democrats regained control of the House of Representatives and Republicans held the Senate in the November 6 midterm elections.
The pro-business tax relief and deregulation seen in the last two years of the Trump administration are unlikely to be rolled back and drastic new policy changes are also unlikely with a split Congress, bankers and investors said.
Bipartisan agreement on billions of dollars of infrastructure spending could boost already robust US bank lending as new leaders on both sides of the aisle cite more infrastructure projects and lower drug costs as top priorities.
President Trump has previously asked Congress to authorize an estimated US$1.5trn in infrastructure projects, though the plan never came to a vote.
US syndicated lending broke records in the first nine months of the year, with US$1.9trn of loans issued to fund mergers and acquisitions, leveraged buyouts, dividends and for debt refinancing, according to LPC.
The new checks and balances of a divided Congress are expected to have little impact on a vigorous US loan market. Banks are still keen to lend and investors have strong demand for floating-rate loans in a rising interest rate environment
“Split control of Congress should offer a little more certainty. Less new, potentially business-friendly, regulatory legislation will be enacted, but what’s already been passed won’t be reversed over the next two years,” said Lauren Basmadjian, senior portfolio manager at credit investment adviser Octagon.
US regulators relaxed guidelines for loans to highly indebted companies earlier this year, easing constraints put in place in 2013 to curb risky lending that could cause systemic problems and result in another financial crisis.
The amount of leverage or debt used by companies in buyout deals has been creeping up in response, which has been attracting criticism from regulators across the globe, but little action.
“There could have been more deregulation if Congress stayed fully Republican and we may have seen some rollback of deregulation if the Democrats controlled both (houses), but instead it seems we’ll be at a stalemate for a while,” Basmadjian said.
A slower pace of change on the regulatory front could be positive for the loan market, a senior investment grade banker said, as lenders prefer a more stable and predictable political environment.
“You don’t want liberals or conservatives undoing what the other side has done after every election,” he said. “Both camps seem to have become more radicalized.”
The election played out as predicted, which lent an initial note of confidence to the US stock market, and also set a positive tone in the loan market. All three major stock indices - the Dow Jones industrial average, Nasdaq and S&P 500 - rallied by more than 2% on Wednesday after a steep October slide.
The loan market will continue to take its cues from the equity market, a leveraged finance banker said, as bankers and investors monitor how new actions from Washington unfold under the new Congress.
Special counsel Robert Mueller has yet to present the results of his investigation into Russian meddling in the 2016 US presidential election and possible collusion between Moscow and the Trump campaign. His report could determine whether President Trump will be impeached or not.
“If there’s an impeachment that’s not going to be great for the market,” the leveraged finance banker said. “If there’s an attack on the tax plan, which I don’t think is going to happen, that wouldn’t be great for the market.”
Any US policy changes are now likely to be incremental, which is likely to keep the investment-grade and leveraged loan markets on track and is unlikely to curb M&A activity, bankers and strategists said.
“Predictability is a relief for the market,” the senior investment grade banker said. “I don’t think it will necessarily stimulate lending, but surprise results may have had the opposite effect if you were a company looking to buy a rival or come to market.”
US Senate Republican leader Mitch McConnell said on November 7 that senators are likely to prioritize infrastructure, Obamacare fixes and prescription drug prices, but that Medicare and Social Security changes were unlikely and any new tax laws would need bipartisan support, Reuters reported.
Nancy Pelosi, the Democrat likely to be the next speaker of the House, meanwhile pledged to protect healthcare while working toward lower drug prices.
While both parties agree that healthcare costs need to drop, it remains to be seen if there can be agreement on how to go about these changes.
Bipartisan support in cutting drug prices could hurt some pharmaceutical companies while other healthcare corporations could benefit as the repeal of the Affordable Care Act, known as Obamacare, is seen as unlikely.
Agreement in the divided Congress over infrastructure spending could produce winners among industrial companies, but lenders remain cautious for now.
“A big infrastructure project spend would see industrial companies benefit, logistics/transportation, there could be multiple industries that benefit. But I’m skeptical,” said Basmadjian.
“There are some local ballot issues that could have a real impact. But if I’m right that not a lot will be passed, and not a lot will be unwound, it shouldn’t really have a lot of impact on specific credits or industries.”
Additional reporting by Jonathan Schwarzberg. Reporting by Lynn Adler and Michelle Sierra Editing by Tessa Walsh and Jon Methven