Private equity firms find it harder to secure funding in the leveraged loan market
Battling high inflation, rising interest rates and economic uncertainty, companies raised less capital in the markets in the first half of the year compared to the first six months of 2021, when the inflation was not as high and many companies resorted to cheap financing to replace priced debt.
The Federal Reserve, seeking to rein in persistent inflation, has raised interest rates three times this year, most recently in June when it raised its benchmark rate by 0.75 percentage points, the largest such a measure since 1994. Stocks and other assets have fallen sharply of late. months, making capital increases and IPOs less attractive.
As the U.S. central bank signals further hikes, executives are taking a hard look at their companies’ financing needs. Many companies, especially those with high credit ratings, have already pushed back their debt maturity dates, making opportunistic financing less likely in the second half of 2022, bankers said.
“Companies are trying to make sure their funding strategy continues to align with their business strategy,” said Will Alston, head of corporate banking at Wells Fargo & Co.
Highly rated U.S. companies raised $515.71 billion through bond sales in the first six months of the year, down slightly from $603.34 billion in the reporting period. previous year, according to Refinitiv. Among the companies that tapped into the investment-grade bond markets were e-commerce giant Amazon.com Inc. with a $12.7 billion issue, healthcare company Bristol-Myers Squibb Co. with nearly 6 billion raised and home improvement retailer Lowe’s Cos., which sold about $5 billion to investors.
Bankers expect lower volumes in the second half. “As funding costs have risen, the economics around pre-funding have become less attractive,” said Dan Mead, head of quality syndicate at Bank of America Corp. “Issuers have built up quite large cash positions over the past couple of years, and some of them are now looking to use some of that money to pay down debt instead of refinance,” Mead said.
Sales of U.S. corporate bonds with speculative credit ratings fell sharply in the first six months of the year to $54.77 billion from $256.1 billion a year earlier, a declared Refinitiv. “As you go down the credit quality spectrum, the issue capacity isn’t as robust,” Wells Fargo’s Alston said. Among the companies that sold high-yield bonds this year were automaker Ford Motor Co., social media platform Twitter Inc. and retail store operator Macy’s Inc., Refinitiv said.
After years of benefiting from low-cost funding, private equity firms are finding it harder to secure funding in the leveraged loan market, the source of most of the capital they use to fund buyouts. Leveraged loans are a type of syndicated loan for companies with a rating below investment grade.
In recent months, banks have reduced their exposure to leveraged loans for fear that they will not be able to resell this debt to investors. “Banks are hesitant to commit new capital,” said Michael Moore, managing director of investment bank Union Square Advisors LLC. “It’s incredibly difficult to assess the cushion needed in this market for new debt exposure,” Moore said.
Buyers and sellers are also struggling to agree on valuations, said Vivek Bantwal, who co-heads Goldman Sachs Group Inc.’s global finance group, referring to transactions in the area of leveraged finance. the sink. “New deals have slowed down, and once the current slate of deals hits the market, the market supply and backlog will be quite low,” Bantwal said.
US companies took on a higher volume of capital through revolving credit facilities in the first six months of the year, according to Refinitiv. They released $840.67 billion worth of revolvers, up from about $752 billion the previous year. Recent deals include a new five-year revolving credit facility by clothing retailer American Eagle Outfitters Inc. and a $3.1 billion deal by packaging supplier Ball Corp.
In the first two quarters, companies raised far less capital by selling convertible bonds, which can turn into stocks. The number and volume of deals fell in the first six months of the year, with companies raising about $8.5 billion from investors, down from $52.47 billion a year earlier, Refinitiv said. Among the companies that sold convertible debt in 2022 was Snapchat owner Snap Inc., with a $1.5 billion deal.
“Higher interest rate levels increase the associated coupon of a new convertible bond, thereby increasing the interest rate burden or cost to the issuing entity,” said Howard Needle, portfolio manager of the investment advisory firm Wellesley Asset Management Inc. Many convertible bonds have fallen in price amid the recent market decline, Needle said.
Increased market volatility has led to a sharp drop in the number of companies seeking to list via an initial public offering, resulting in an IPO market that is basically closed, bankers said. “Most of the IPO calendar is geared towards the fourth quarter of this year or even next year,” said Jeff Bunzel, global co-head of equity capital markets at Deutsche Bank AG. “A lot of companies will just move their plans to next year in the belief that markets and valuation expectations will be normalized by then.”
For the market to unfreeze, the major stock indexes will have to stop swinging wildly as investors assess soaring inflation, interest rate hikes and an uncertain economic outlook. “What we really need is to see some big, well-known issuers come into the market at a price point so that they trade positively thereafter,” said Josh Weismer, head of the capital markets business. clean at Mizuho Americas.
The number of special purpose acquisition companies, which present themselves as shells in public markets to raise money for the takeover of another company, surged in 2021. Since then, volumes have declined, many SPACs that have gone public are still looking for suitable acquisition targets. , say the bankers.
Market volatility makes it less attractive for companies that have already gone public to sell new shares to investors. The amount of proceeds raised through these follow-on offerings fell to $21.4 billion in the first six months of the year, from about $110 billion in the year-ago period, said Refinitiv.
“In late 2020 and most of 2021, many companies raised capital because they could, often without a defined use of proceeds,” Weismer said. Among the companies that recently entered the follow-on market was American Tower Corp., a real estate investment trust that raised about $2 billion.
Volumes are unlikely to rise quickly, bankers said. “The only thing that’s going to get funded is when people need to fund,” Deutsche Bank’s Mr Bunzel said, pointing to mergers and acquisitions, where companies might need a component. in equity. “You could also see some companies raise capital in order to address potential balance sheet and rating considerations,” he said.