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NEW YORK, April 6 (Reuters) - A spike in first-quarter US syndicated loan refinancing activity helped to sharply boost underwriting fees for arranging banks, even though the deals typically pay lower fees than new loans, according to Freeman Consulting Services.
Issuance was dominated by companies rushing to lock in low borrowing costs before interest rates rise, as US mergers and acquisitions (M&A) activity was stifled by a lack of detail about planned Trump administration tax and trade policy changes.
The Federal Reserve raised interest rates in March, hard on the heels of its December 2016 increase, and is signaling two more hikes this year.
“There’s so much refinancing and repricing that it’s still creating quite a large fee pool,” said Jeff Nassof, a director at Freeman Consulting.
Fees of about US$2.9bn paid to banks arranging US leveraged loans in the first quarter were 116% higher than a year earlier and were the highest first quarter earnings since 2000, Freeman data shows.
This spurt helped offset a 10% drop in fees earned on US investment-grade loans, and contributed to a sharp jump in total US investment banking fees in the first quarter from a year earlier.
“Refinancing and repricing does pay lower fees, but it’s the sheer scope of this activity,” Nassof said.
Refinancing loans totaled US$409bn and accounted for three quarters of all US first quarter syndicated lending, according to Thomson Reuters LPC.
Fees on business including M&A advisory, equity and bond underwriting as well as syndicated loan arrangement leaped 39% in the first three months of the year from the same period last year to about US$11.6bn, according to Freeman Consulting.
While refinancing is keeping loan volume high, new lending is taking a backseat pending progress on President Trump’s vows to overhaul US tax and trade policies.
The administration’s inability to repeal and replace the Affordable Care Act, commonly known as Obamacare, late in the quarter raised concerns about its other plans and helped to keep new-money lending subdued, said bankers and investors.
“People will move on the M&A side as it grows more certain either way: either Trump starts getting his agenda done, and as such it’s predictable, or Trump doesn’t get his agenda done at all, and as such it’s status quo,” a senior banker said.
Many corporations are awaiting details of potential changes including the first tax holiday in more than a decade, which could encourage companies to bring offshore cash back to the US at lower tax rates, as well as altered international trade agreements.
“If you’re a CEO of a company and you don’t know what’s happening with the trade agenda, how are you going to buy a company that has significant operations in Mexico?”, the banker said. “You’re not.” (Reporting by Lynn Adler; Editing By Tessa Walsh)