Bankers and investors are expecting US merger and acquisition (M&A) activity to pick up in 2017 as fiscal stimulus, tax reform and other policies supporting economic growth are introduced by President-elect Donald Trump and the new Republican administration.
This could make 2017 one of the biggest years ever for leveraged buyouts, according to Brendan Dillon, co-head of global leveraged finance at UBS.
“In terms of the LBO space, I think there’s going to be a ton of activity,” Dillon said.
Leveraged loan bankers and investors are hoping that a pro-business environment and stronger economy will stimulate private equity buyouts in 2017 after focusing on refinancing and repricing existing deals in 2016.
“The new administration is saying the right things. There’s no shortage of money to make acquisitions. It’s about creating the environment where M&A can get done. That’s why I think the proposed regulation changes are positive,” said a second senior banker who works on private equity financing.
Lending to private equity buyouts almost doubled year-on-year in the fourth quarter of 2016 to US$37.1bn from US$19.7bn in 2015 after a flurry of dealmaking followed the US election in early November.
The combination of a new Republican president and a Republican Senate and House of Representatives that are both pushing for growth is expected to move the economic focus from monetary policy to fiscal policy and put fiscal stimulus and tax reform at the top of the agenda and regulatory change is also on the cards, bankers, lawyers and investors said.
“This handoff from monetary to fiscal is a very powerful change in the way capital is being allocated and earned,” said Mark Okada, chief investment officer of Highland Capital Management.
This sea change would benefit risk assets, and further boost demand for leveraged loans, which increased last year as investors tried to buy floating rate loans to hedge against future interest rate rises.
“That’s going to be very bullish for risk assets. It’s going to take a long time for all this to materialize, but it does change the way someone like me looks at the world,” Okada said.
SHORT OF PAPER
The US leveraged loan market saw a shortage of supply in 2016. Leveraged M&A dipped by 18.3% to US$270.4bn from US$331bn in 2015, according to data from Thomson Reuters LPC, while investor interest in loans soared as volume recovered throughout the year after a particularly quiet first quarter.
Demand climbed as December’s US interest rate rise drew nearer, boosted by rising loan fund inflows and higher rates of CLO creation in the second half of the year. In the week ending December 7, investors added US$1.8bn into loan funds, the highest figure since August 2013. The four-week moving average for loan fund inflows was US$1.2bn on January 4, although only US$865m was placed into loan funds for the week ending January 4.
The focus on existing deals in 2016 pushed refinancing volume 7.7% higher to US$362bn, compared to US$336.2bn in 2015, but the balance is expected to shift back to new M&A this year as Donald Trump nominates and appoints deal-friendly Wall Street veterans to his cabinet.
Higher equity valuations after the US election will continue to favor leveraged corporate buyers that can outbid private equity firms, including UnitedHealth Group Inc’s US$2.3bn purchase of Surgical Care Affiliate Inc, which was announced on January 9, but more new private equity buyouts could be seen in 2017.
Multiple auctions are in process, including a few very large sponsored deals that could be announced in the first quarter, a leveraged finance lawyer said. Private equity firm Onex is reported looking to sell USI Insurance Services for as much as US$4bn, Reuters reported.
More new private equity buyouts could be seen particularly in sectors that could benefit from the change of administration which could encourage M&A activity. Pharmaceuticals, defense and business services could fare better, as well as technology, although prolific tech issuers could be forced to pay higher rates to get deals done, Dillon said, as investors already have high exposure to the sector.
“I think that the big difference between the last administration and now is that there will be a major shifting of priorities, including certain sectors falling out of favor and others becoming more attractive; and that makes for increased activity and repositioning which fit very well with the sponsored finance universe,” Dillon said.
The tone in the fourth quarter of 2016 was stronger than a year earlier, when falling oil prices boosted volatility and raised fears over the economy and some buyout loans, including the financing for software company Veritas, the largest buyout of 2015, struggled to syndicate and were stuck in the market.
Investor demand is showing no sign of dropping and with confidence in the strength of the economy high, investors are more bullish about M&A prospects in 2017.
“As long as the financial markets are accommodative, I would anticipate that transaction flow will continue,” a CLO investor said.
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