NEW YORK (Reuters) - A late-year burst of mergers and an unrelenting push by companies to cut borrowing costs propelled US syndicated loan issuance to a record high this year, with pending corporate tax rate cuts seen motivating fast-paced lending at least into early 2018.
A corporate tax rate cut to 21% from 35% under a new US tax system, as well as the potential to relax or repeal US leveraged lending guidelines, likely will keep stoking corporate acquisitions and leveraged buyouts, bankers and attorneys said.
US syndicated lending reached an all-time high of US$2.41trn as of December 19, jumping 24% above US$1.94trn in the same period last year and 13% above the previous full-year record of US$2.14trn set in 2013, according to Thomson Reuters LPC.
“At the moment, the markets are open and can absorb very large financings,” said Robert Kilcullen, managing director, corporate advisory at MUFG.
“Outside of a few sectors, I don’t think there’s anything that’s going to give a buyer pause to think that the bank lending market is not going to be there,“ he said.
Leveraged lending to highly indebted companies leaped 62% to about a record US$1.33trn from US$821.4bn in the same period last year. The prior high was US$1.13trn for full-year 2013.
Repricing and refinancing represented two-thirds of the volume as borrowers locked in more favorable terms before interest rates increase further. Most deals met with ardent investor demand.
The year began with extremely sluggish lending for new deals, as the markets endured several failed attempts by the Trump administration to overhaul the Affordable Care Act, two large health insurance mergers being scrapped in April due to antitrust rulings and hesitation to push ahead with acquisitions if tax relief was on its way.
The pace picked up as the year progressed, when it became clear that tax reform was a longer-term prospect. Companies looking to expand in a slow-growing economy did so by buying corporations with complementary businesses.
In recent weeks, the tax debate heated up as did M&A activity. Congress is voting Tuesday on the biggest overhaul of the US tax system in more than 30 years, paving the way for President Donald Trump to sign the bill into law as early as Wednesday.
Lending to high-grade companies slipped 7% this year to US$802.8bn from US$864.8bn for the same period last year, but has sharply increased in recent months.
As corporate tax rates are sliced and companies can more cheaply access cash stockpiles held overseas, mergers could keep ramping up, bankers and attorneys said.
Borrowing costs remain advantageous and investor appetite remains ardent, should companies seek new financing to back acquisitions.
Leveraged financings this year included office supplies retailer Staples Inc’s US$2.9bn term loan backing Sycamore Partners’ buyout of the Staples delivery business, and a US$1.85bn credit facility backing US internet security company DigiCert’s purchase of Symantec’s web certification business.
Prominent investment-grade loans included the US$13.7bn bridge loan for Amazon.com’s purchase of upscale grocer Whole Foods Markets, shaking up the food supply chain business and promising more tie-ups altering delivery models in arenas including pharmaceuticals.
“Every smart Wall Street firm is thinking about the merger of technology and retail, so that’s a big topic around consolidation,” a senior banker said.
And in the final month of the year, US$49bn of loans funded the cash portion of US drugstore operator CVS Health Corp’s purchase of health insurer Aetna Inc.
The CVS loans, the second-largest new acquisition loan financing on record, could be dwarfed if Broadcom Ltd’s hostile bid to buy US chipmaker Qualcomm for US$103bn is successful.
“Outside of a few pockets, including retail, fundamentals have been very strong throughout the year and were getting stronger over the course of the year,” said Adam Brown, senior portfolio manager and co-head of high yield at Macquarie Investment Management, Americas.
“We’ve been hearing management teams talk with a lot of confidence about their business and forward looking outlook,” he said.
Whether 2018 repeats this year’s record total lending depends in large part on tax policy ripple effects.
“If companies are more easily able to access cash trapped overseas, investment grade companies will have a reduced appetite for issuing debt in the US when they can simply utilize the cash that’s overseas,” said Steven Oh, global head of credit and fixed income at PineBridge Investments.
On the leveraged side, limits on interest deductibility could increase costs for highly indebted companies, increasing their chance of defaulting in an economic downturn, Moody’s Investors Service said last week.
Still, most businesses expect gains from capital spending deductibility and newly lowered tax rates could offset the interest deduction hit, bankers said.
Reporting By Lynn Adler; Editing by Leela Parker Deo