| NEW YORK
NEW YORK Lending to U.S. investment grade companies has started the year at the lowest level since 2014, as companies delay pushing mergers and acquisitions (M&A) forward before details about President Donald Trump’s tax and trade policies emerge, bankers and attorneys said.
Banks syndicated only US$57bn of U.S. high-grade loans in January and February, the lowest volume for the first two months since US$59bn three years ago, according to Thomson Reuters LPC data.
New M&A deals are in short supply while a lack of clarity remains. Only US$8.5bn of U.S. M&A loans were signed in the first two months, which accounted for only 15% of total investment grade volume, down 66% on US$25bn in the same time last year, although work is continuing on prospective deals in the background.
“There certainly seems to be a lot of M&A chatter, but not a lot that is actionable near term,” said Jason Kyrwood, partner at Davis Polk. “There is an unprecedented level of uncertainty on some pretty fundamental questions.”
Last year, U.S. investment grade lending was 39% higher at US$93bn in the first two months of the year as M&A deals flowed. This year details about proposed expansive policy overhauls remain scarce and billions of dollars of bridge loans have been cancelled as M&A deals failed.
Capital markets viewed President Trump’s speech before a joint session of Congress this week optimistically, however, retaining expectations of a pro-growth and pro-business environment.
“The underlying landscape is positive, but there is still a lot of uncertainty about the outlook for certain policies that might impact dealmaking,” said a senior banker. “Tax and trade, interest deductibility and the possible repatriation of cash are some of the examples of key administration proposals lacking specifics.”
Regulatory uncertainties, as well as negotiating valuations that work for each company, are also slowing M&A decisions, bankers and attorneys said.
With insufficient certainty or stability for M&A deals, most investment grade loans completed this year have been for general corporate purposes, rather than event-driven lending.
These ‘plain vanilla’ financings include multibillion dollar loans for farm equipment maker Deere & Co, cereal maker Kellogg Co, payments company Visa Inc and service station company Pilot Travel Centers.
While the deals are substantial, they do not compensate lenders for the loss of several large M&A deals that have been busted by antitrust rulings, particularly in the pharmaceutical and insurance sectors ahead of planned healthcare reform, which is stalling new transaction announcements.
Many dealmakers are eager for a few large mergers – such as telecom giant AT&T’s pending US$85.4bn takeover of media company Time Warner - to come to fruition as test cases before moving forward.
“With political and regulatory uncertainties factored into the markets, it is no surprise that M&A volume has been muted - particularly in those regulated industries most affected by the changes we’re seeing in Washington,” said Art de Pena, managing director and head of distribution, trading & agency for MUFG’s syndications group.
Last year, U.S. M&A deals made up around 70% of the record US$804bn of M&A deals that were pulled globally, most of which were investment grade, according to LPC data.
Although banks are still committed to providing lucrative M&A bridge loans, demand is expected to remain subdued until details emerge on the numerous planned Trump administration policies.
“Corporate tax reform for us remains the key policy to follow in the coming weeks/months, and in addition the replacement of Obamacare as that appears the first priority of the new administrations and could delay tax reform,” Bank of America Merrill Lynch analysts wrote in a report.
(Reporting by Lynn Adler; Editing By Tessa Walsh)