NEW YORK, Sept 29 (Reuters) - A burst of loans to highly indebted companies to cut borrowing costs and acquire corporate targets while interest rates remain low boosted US syndicated lending by 24% to an all-time high for any nine-month period, charting a course toward a record issuance year.
The torrent of leveraged loans to low-rated borrowers came just as more high-quality corporations - unwilling to wait any longer for new US tax or trade policies before merging with complementary businesses while money is cheap – also propped up investment-grade lending.
Total US$1.75trn syndicated loan issuance this year is up from US$1.41trn in the same nine months of last year, according to Thomson Reuters LPC. A typical fourth-quarter lending pace would lead full-year volume to surpass the prior record US$2.14trn set in 2013.
The slow but steady economic growth, along with gradually rising interest rates and the US administration’s new focus on slashing taxes, should keep the lending machine open for refinancings and acquisitions, bankers agree.
“The markets are robust and people are hungry for new business,” said one senior banker. “People are optimistic that there will be more large corporate M&A activity, LBOs (leveraged buyouts) and M&A in the middle market as well.”
A Republican outline on Wednesday for long-awaited tax system reform stirred market optimism, after repeated efforts to overhaul healthcare policy failed this year.
The prospect for lower tax rates could stimulate more corporate dealmaking, although bankers said the proposal was light on specifics regarding key matters of interest cost deductibility and repatriating cash held overseas.
“If they can get tax reform done, then there is hope they can get the debt ceiling and other things done which should provide market stability and, frankly, more certainty for business decisions,” said Jonathan DeSimone, managing director at Bain Capital Credit.
“That said, there are no real details on the interest side – and until you know what the interest deduction looks like it’s only a starting point until, or if, something on the President’s desk is signed.”
Underlying the leveraged loan spurt has been an unquenched investor thirst for floating-rate assets when interest rates are expected to go up.
Leveraged lending spiked by 65% in the first nine months to about US$994bn from US$601bn a year earlier. Third-quarter issuance of US$242bn was up 10% from the year-ago quarter.
Collateralized Loan Obligation funds, the largest buyers of leveraged loans, have issued about US$80bn so far this year, a 74% spike from US$46bn in the same period a year ago.
Even with minor net selling since late August, retail investors have poured US$16.6bn into loan mutual and exchange traded funds this year, according to Thomson Reuters Lipper.
Loans for supplies retailer Staples Inc’s delivery business buyout by Sycamore Partners, and for a large dividend payment by software security firm McAfee, were among the varied roster that also featured waves of repricings to sweeten borrower terms.
“For the leveraged loan market, the main theme has been a much more stable market than people anticipated,” said Art de Pena, managing director and head of distribution, trading and agency for MUFG’s syndications group. “Concerns about geopolitical issues and US political rhetoric have not really affected the market.”
With this flood of issuance, encouraged by ongoing appetite for higher-yielding investments, buyer protections have eroded.
The US$541bn of so-called covenant-lite leveraged loans issued so far this year is 161% greater than the US$207bn in the same period last year.
“There’s been increasing weakness in loan term sheets, in covenants and the terms that loans are issued under,” said Michael Nechamkin, senior portfolio manager and co-chief investment officer at Octagon Credit Investors. “Borrowers have more flexibility than they’ve ever had in the past.”
Lending to top quality companies has been more episodic.
A jet stream of aerospace and defense transactions boosted third-quarter activity versus a year earlier, helping minimize the impact of first-half lending.
Investment-grade lending is now down more around 7% year-to-date. Bankers said volume could near last year’s pace as more companies in a slow-growing economy look to expand by making acquisitions.
Some of the biggest loans announced in the third quarter backed big mergers by United Technologies and Rockwell Collins as well as by Northrop Grumman and Orbital ATK.
These two combinations helped drive US aerospace and defense M&A this year to a record, according to Thomson Reuters Deals Intelligence.
“There comes a point where you need to go on with your business and worry about market share and profitability and product extensions or reductions, and you can’t necessarily wait much longer,” said de Pena. (Reporting by Lynn Adler; Editing By Jon Methven, Michelle Sierra)