Debt markets are expected to remain wide open as the new year dawns, says Morrison & Foerster in a new note on private equity trends. “Credit lenders continue to successfully raise funds so there is a lot of dry powder looking to be deployed,” says London-based partner Chris Kandel. More funds raised presumably means companies, especially those backed by sponsors, have more options than ever to source financing.
“Overall, the market for leveraged debt should continue to be strong in 2022,” Kandel says, “Notwithstanding some pricing concerns from potentially rising interest rates, inflation and a tapering of quantitative easing, which all results in more volatility.”
That means lenders’ risk appetites could continue to remain robust, potentially facilitating “sponsor-friendly” provisions like covenant light loans.
But somewhat ironically, it could also mean that financial sponsors become more selective about the transactions they pursue: increased competition could translate into a desire to save time on auctions. Morrison & Foerster sees private equity bidders passing on low-conviction targets earlier in sale processes, while focusing efforts on pre-empting sales for high-conviction assets.
Another implication of the rise in leveraged loan transactions is a backlog of accompanying dividend recapitalizations. The scope may well be unprecedented: investors pulled $26.8 billion out of private equity-backed companies though September, the highest figure since Leveraged Commentary & Data began collecting data.
The most interesting impact of the current rise, though, might be a few years out. Given the historical average of 3 years between buyout and dividend recap, S&P reasons the ongoing M&A frenzy could well spawn more recapitalizations in the foreseeable future.
“The CLO markets continue to be strong; there are no signs of solvency or other issues at banks; and GDP continues to grow at healthy rates,” Kandel reasons.
Catalysts for debt availability are surging into the new year.
–Brandon Zero
