NEW YORK, Dec 2 (IFR) - An uptick in M&A activity should
help bolster US junk bond sales next year, reversing a
three-year decline in primary volumes for the asset class - or
so bankers hope.
The prospects for stronger economic growth under a Donald
Trump presidency has reignited hopes for a boost in debt-fueled
acquisitions, including leveraged buyouts.
That should offset a likely decline in refinancing activity
following the recent spike in US Treasury yields and
expectations of more aggressive monetary tightening by the
"The increasing rate environment will probably put a damper
on the amount of refinancing next year," Marc Warm, head of US
high-yield capital markets at Credit Suisse, told IFR.
"But at the same time I would expect M&A financings to
increase driven by the perception of better economic growth from
the perspective of corporate boards and private equity
Warm expects US junk bond supply to hit US$220bn next year,
roughly flat to 2016 levels, with acquisition-related financing
increasing to 30%-40% of total issuance from around 25% this
Refinancing activity, on the other hand, should decline to
around 50% of total issuance from just over 60% this year, Warm
Keeping primary volumes flat to this year's level would be
an accomplishment in itself, and reverse the trend of declining
issuance since 2013.
At US$205bn so far this year, US high-yield issuance is down
nearly 20% compared to 2015 and 38% lower compared to the
US$329bn recorded in 2013, according to Thomson Reuters data.
Market participants are predicting that 2016 volumes will
likely reach anywhere between US$210bn-US$220bn by year's end.
Bankers are hoping that M&A driven transactions will
bolster 2017 volumes, much like Dell's acquisition of EMC and
Western Digital's purchase of SanDisk did this year after the
sell-off in crude put the brakes on new issuance activity.
"The question continues to be where the supply is going to
come from," said Tim Broadbent, a managing director in Barclays'
leveraged finance syndicate, who also expects junk bond supply
to remain roughly flat next year.
"M&A and LBO volumes are key to making this happen."
Many spy opportunities for consolidations, spin-offs and
buy-outs if Trump carries out promises to boost infrastructure
spending and cut back regulations across a host of industries.
"You have a pro-growth president that has a different view
on certain sectors like coal, mining, defense and healthcare,"
said Brendan Dillon, co-head of global leveraged finance at UBS.
"There is going to be a lot of M&A activity associated with
But such hopes may be premature. The recent rally in stocks
has sent equity valuations to new highs, creating potential
hurdles for public-to-private deals while strategic buyers still
have plenty of cash on hand to outbid sponsors.
"These factors which have made high yield M&A financings
harder are still going to be in place next year," said
And growth prospects in the US are far from certain given
elevated political risks and higher rates.
"Political headwinds are potentially very challenging in the
coming year," said Niklas Nordenfelt, a senior portfolio manager
at Wells Fargo Asset Management. "To expect further expansion in
the face of rising rates requires a fair amount of optimism."
Bank analysts remain sharply divided on total return
expectations for the US high-yield asset class, with JP Morgan
forecasting a 8.3% gain and Morgan Stanley calling for a 2.7%
loss. Total returns were just over 15% this year - outperforming
both investment-grade corporates and emerging markets.
For now, however, bankers shrug off such concerns, noting
that pipelines - particularly on the LBO side - have already
showed signs of improvement.
"Although valuations will be high this will be offset by
better growth prospects of the targets," said Credit Suisse's
Warm. "Deals will be more expensive but there is a lot of dry
powder out there."
(Reporting by Davide Scigliuzzo; Editing by Paul Kilby and