Issuers accelerate borrowing plans ahead of U.S. elections

Borrowers are bringing deals forward amid a noticeable pick-up in activity in the US and Europe since the end of August. A window of opportunity has opened for companies to take advantage of strong bond and loan markets while interest rates are low and credit spreads are tight, which is boosting M&A activity, reports Reuters.

“Issuers are definitely pulling things forward, no question. There’s a sense of getting deals done now,” a senior loan syndicator said.

Bankers are seeing increased M&A activity in the US and Europe for investment grade and leveraged companies, including cross-border deals and a wave of opportunistic repricings, refinancings and dividend recapitalizations for leveraged private equity-owned firms.

“Everything went crazy in the last week of August. We’re working on a lot at the moment, definitely more than we’ve had at any other point this year, including some really big and interesting stuff,” the senior loan syndicator said.

The upturn in activity is less noticeable in Asia, which has deeper local currency markets and fewer borrowers tapping the US term loan B market than Europe, although Asian borrowers are more focused on Federal Reserve moves that will determine the pricing of future dollar-denominated loans.

Increased transatlantic activity, however, coincides with nervousness around the possibility of Republican nominee Donald Trump winning the US presidential election as polls converge and the implications for markets, which are also facing a wave of European elections.

“People are nervous about the US elections, no-one’s asking what will happen if Hillary wins, all are asking what will happen if Trump wins,” a senior lawyer said.

Democratic nominee Hillary Clinton is seen as being more in favor of corporate and income taxes with government borrowing for infrastructure and less spending. Trump is less predictable and is expected to spend on infrastructure but get rid of corporate taxation.

The US election and raft of European elections in 2016 and 2017 mean that global political considerations are becoming a bigger issue for lending and overshadowing the macroeconomic malaise as central bankers continue to dictate policy.

Investors on both sides of the pond are also looking past the US elections to the Federal Reserve’s possible decision to raise interest rates in December. Volatility has picked up in the last few weeks across all risk markets on the fear that quantitative easing and other central bank easing policies might be coming to the end.

TIMING CONSIDERATION

The window of opportunity is creating a timing issue for underwriting banks, which are finding it hard to predict what the markets will look like after the US election and difficult to predict investor appetite now for deals that will complete later this year or early next year.

Deals that were signed over the summer or in recent weeks are likely to close by the US election. But deadlines are likely to stretch on M&A deals where borrowers control the process and bankers need to complete preparation such as ratings work or pro forma accounting.

“Borrowers are in control of M&A processes – if it’s an event deal and there’s preparation to be done, unfortunately we’re having to underwrite through that window. The specifics of what happens if either party wins and how the credit markets will react is absolutely part of the discussion,” the senior syndicator said.

Although some are comparing the US election result to the brief, if chilling, effect of the Brexit vote on the markets this summer, most concede that the US election is a bigger global issue given the size and strategic importance of the American economy.

“I’ve heard some people say ‘business as usual’, but we’ve never had a situation before this polarizing in the US or globally. No-one’s screaming that this is the best thing ever happening,” the senior lawyer said.

Deals signed in October or November are unlikely to close until the end of the year or early next year. Although banks are going through credit processes, they are worried about potential turbulence and its effect on investor appetite.

“Deals either need to be signed up now or you need to have the book together. If the book is not full up to the election, you have to be questioning whether you can put your book together post-election,” the senior lawyer said.

European companies that are planning to issue debt in the US are being advised to do so before October and avoid late November to avoid any volatility and minimize the prospect of hung deals for underwriting banks.

“No-one wants to get into a situation where markets and events cause an underwriting to market problem. The markets don’t like uncertainty and there’s quite a lot of risk out there,” the senior syndicator said.

Despite the uncertainty, the loan asset class and leveraged loans in particular are still seen as offering good returns given a lack of viable alternatives and investor appetite is strong for now with a supply-demand imbalance in the US and Europe.