- Interest rates low, but deals remain slow
- Sponsors, corporates have plenty of cash
- Fed tapering expected to begin at end of Q1
“We are rapidly approaching the time of year when storied or challenged credits will sit idle on investors’ desks as they focus on year-end closings,” Stefan Shaffer, managing partner of New York-based SPP Capital, wrote in the firm’s monthly market update. “Issuers’ time is better spent on preparing good offering materials and financial models for launch in January when market conditions become more hospitable.”
The shift is something of a reversion to a more conventional seasonal pattern, after several years of volatility in leveraged lending, Shaffer told Buyouts.
“The conventional thinking in the market has always been, by the time you get into November, unless you have a real, specific need to close, you would wait.”
In 2012, borrowers broke that pattern as they rushed to close deals ahead of a year-end “fiscal cliff” that was expected to bring higher tax rates, and which in fact did so. A similar year-end crunch occurred in 2010, when the expiration of the Bush-era tax cuts was averted with an 11th hour agreement to extend those breaks.
That said, lenders remain eager to put money to work, in part because dealflow has been slack and capital for deals has been underdeployed, Shaffer said. “People are still looking at deals as if it were Sept. 1 and not Nov. 15.”
Loan markets remain highly competitive, especially for subordinated debt, both by banks and non-bank issuers such as business development companies, SPP Capital said in its update. “Many lenders (primarily BDCs, but many credit opportunity and traditional LP funds as well) can avail themselves of leverage on a given transaction if they are provided a second lien. With a leveraged return, these lenders can pass on the savings to the issuer,” so that subordinated debt that usually prices around 12 percent can be found at rates of 9 percent to 10 percent.
Despite favorable borrowing conditions, though, capital spending has remained weak, held down on the public side by budget deficit-cutting and on the private side by slack capital investment, held down by weak consumer demand. And while both financial sponsors and strategic corporate acquirers are flush with cash, a long period of low interest rates has eliminated much of the urgency to act, as borrowers have had more than three years to refinance more expensive pre-financial crisis debt.
That could change next year, when the Federal Reserve is likely to reduce its purchases of long-term bonds, causing interest rates to rise, an action that may come at the end of the first quarter, Shaffer said.
“When tapering begins and you see a more normal yield curve, you probably will see more activity.”