NEW YORK (LPC) - Bank lending to high-quality US companies to fund acquisitions has slowed due to concern over government policies amid the summer doldrums, but is expected to pick up after the Labor Day holiday, bankers said.
No bridge loans were recorded by Thomson Reuters LPC in July, for the first time in any month since March 2017, as a more cautious tone set in over the summer after several acquisitions fell apart and US trade wars escalated.
Overall investment-grade lending in the third quarter is running at a slower pace than last year. Volume of about US$44bn in the third quarter so far has been vastly skewed toward refinancing rather than mergers and acquisitions (M&A), and is currently around 24% of the US$181bn seen in the full third quarter of 2017.
“On the acquisition finance side, there are vagaries coming out of Washington and some one-off deals that have fallen away, but none of this is moving people to the sidelines to such a degree that they aren’t going to do deals,” said Robert Danziger, MUFG managing director in U.S. investment grade loans.
“I do not believe that we are in a frenzied or frothy environment, but rather, in a more focused, methodical environment,” said Danziger.
Investment-grade lending is still 14.5% higher in 2018 so far at around US$574bn compared to a year earlier, but M&A activity has slowed after national security concerns sank deals over the summer and fears of trade wars intensified.
“Washington-related uncertainty, including issues relating to tariffs, anti-trust and CFIUS, combined with continuing high valuations, might be having a dampening effect on dealflow currently,” said Jason Kyrwood, partner at Davis Polk & Wardwell.
CFIUS refers to the Committee on Foreign Investment in the United States, which reviews proposals to determine if they threaten national security.
Last month, chipmaker Qualcomm Inc dropped its US$44bn bid to buy NXP Semiconductors after failing to secure approval from China, with the deal embroiled in a trade standoff between China and the U.S.
Then in other scuttled tie-ups, Tribune Media ended its US$3.9bn deal to be bought by Sinclair Broadcast Group in early August after regulators objected to the combination, while drug store chain Rite Aid and US grocer Albertsons also agreed to end their US$24bn merger after opposition from advisory firm Institutional Shareholder Services.
In the background, AT&T’s already-closed US$85bn deal to buy Time Warner is being appealed by the Department of Justice. While this is unlikely to be reversed, it has sounded a note of caution for M&A dealmakers, bankers said.
The loan market remains open although political volatility and growing concerns in the late cycle market along with the effect of further interest rate rises curb the corporate sector’s enthusiasm for growth by acquisition.
“Financing markets continue to be strong, even as interest rates are rising, and the economy seems to be humming along,” Kyrwood said.
Bankers still expect M&A to resume momentum in the final months of the year, as financing is plentiful and companies push ahead with buy and build strategies.
“I know a lot of syndicators who are taking some well-deserved time off,” said one banker, who sees a regrouping over the summer before the next deal push. “Arrangers are looking to make up for lost fees from canceled M&A deals.”
Reporting by Lynn Adler; Editing by Tessa Walsh and Michelle Sierra