NEW YORK (LPC) - Reduced corporate tax rates and a push to borrow before interest rates rise further propelled US syndicated lending for mergers and refinancings to a record high for any half-year period, with heated deal flow seen at least through year-end.
The record US$1.45trn of loans issued in the first six months of 2018 to companies for acquisitions, leveraged buyouts, dividends and refinancings beat the prior high of US$1.31trn set in the same period last year by nearly 11%, according to Thomson Reuters LPC.
Some of the deals were building in the queue waiting for the corporate tax rate cut to 21% from 35% that a new US tax system ushered in this year.
Companies also have the incentive to tap credit markets now before borrowing costs increase. The Federal Reserve, which has raised interest rates seven times since late 2015 as the economy expands, said it expects two more hikes this year and three next year.
“With the uptick in interest rates, with the Fed signaling two more rate hikes this year, and with people waiting for the bogeyman around the corner, there is real worry that the loan market may be starting to turn,” said Ellen Snare, a partner at King & Spalding.
“Borrowers are getting a sense that if that happens they’re going to have to pay more, so they want to get into the market sooner rather than later,” she said, adding “I think the next six months will be as busy as the first six months of this year for new offers and refinancings.”
Total lending rose to a record US$821bn in the second quarter from US$624bn in the first quarter, smashing the prior quarterly high of US$704bn set in last year’s second quarter.
“For most of 2018, demand for loans has outpaced loan issuance,” said Gretchen Lam, senior portfolio manager at Octagon. “Leveraged loans, in the face of increasing Libor and interest rates, have become all the more attractive to a number of different investors globally.”
Leveraged loans are floating-rate assets, typically gaining appeal to investors as interest rates rise.
For the first six months, about US$737bn of leveraged loans was issued to highly indebted companies, second only to US$770.4bn in the same half last year.
Around US$551bn of loans, the highest half-year volume on record, were extended to blue-chip companies.
On the demand side, issuance of Collateralized Loan Obligation funds, the biggest buyers of leveraged loans, is on track to set an annual record, while retail bank loan funds have already pulled in around US$8bn in net investment this year, Lam said. Separately managed accounts, including insurance companies, have also had “meaningful inflows.”
Borrowers in the first half included Walt Disney Co, MGM Growth Properties, Cigna Corp, Crown Castle International Corp, 24 Hour Fitness, Valeant Pharmaceuticals, Dollar Tree Stores, Mohegan Tribal Gaming and Mavis Tire Supply.
Lending to companies embarking on corporate marriages has jumped in recent months, and appears likely to escalate after a key US ruling approving the long-pursued AT&T/Time Warner tie-up.
A federal judge this month said the US$85bn deal, first announced in October 2016, could go forward without conditions.
“Everyone was laser-focused on the AT&T decision, and that decision’s impact on future M&A and concern about monopolies,” said a senior banker. “We think we’re now going to see more financing activity, and that there are better prospects for growing businesses both organically and with M&A.”
M&A lending reached US$194bn in the second quarter, the highest quarterly tally ever. The quarter’s rush pulled M&A volume to US$363.5bn for the first half, second only to the record-setting US$338bn in the second half of 2015.
In the forefront now are Disney and Comcast, competing to buy Twenty-First Century Fox’s media assets, with banks lining up to provide each with large loans.
Part of the equation for high-grade M&A is the demand for permanent bond financing that replaces initial shorter-term loans.
Investment-grade bond issuance this month has been the busiest for any June on record, IFR reported. Included were Walmart’s US$16bn issue for the purchase of Indian e-commerce company Flipkart, and Bayer’s US$15bn deal to back its acquisition of US seed maker Monsanto.
“There are a lot of macro events in flux, including moving from quantitative easing to quantitative tightening,” said Matt Daly, head of credit research/investment research at global investment management firm Conning.
“In the investment-grade market, more global multinational companies are impacted by trade uncertainty, and some of the political jitters with the Euro Zone right now – all of that has implications for demand” for the bonds issued to back acquisitions.
Reporting By Lynn Adler; Editing by Michelle Sierra