Next year is shaping up to be a strong on for leveraged finance thanks to M&A and refinancing activity, according to the Capital Markets group at Mitsubishi UFJ Financial Group (MUFG).
Grant Moyer, head of leveraged capital markets at the firm, said, “We are at one of the greatest times ever to issue in the high yield market, especially if you’re a double-B or single-B credit.
“The world is awash with liquidity, rates are low [and] expected to be low for quite a long…time, and there’s a tremendous amount of optimism as we look at potential vaccine effects of moving beyond COVID and as we look toward the middle of 2021.”
Moyer cited this year’s record-high issuance of more than $400bn, as well as the BofA Merrill Lynch US High Yield Index’s record-low yield of 4.5% on December 4, which surpassed the previous low of 4.9% in June of 2014.
MUFG’s Capital Markets group expects corporate M&A, private-equity buyouts and refinancing to drive the largest share of debt issuance below investment grade in light of narrowing credit spreads.
“What drives M&A is confidence level in the boardroom,” Moyer said, adding that companies are willing to take on more debt in pursuit of acquisitions because they have greater clarity about the future improvement of their own operating performance, as well as the performance of potential acquisition targets.
“I think we’ll see higher leverage [in 2021],” he added, though he noted that in some struggling sectors that have yet to recover from the pandemic – such as retail, travel and hospitality – leveraged buyouts will remain challenging and may entail more elaborate financing structures.
Moyer added that for companies undergoing bankruptcy, the current credit environment provides an opportunity to refinance debt at lower rates.
He said, “One of the things that happens whenever [there’s] an [economic] downturn is [that] companies that were barely hanging on [file for bankruptcy]. [T]hat creates…an opportunity to recycle capital, streamline businesses, make them more efficient, and then create actual capital, investment opportunities and financing opportunities,” he said.
“Because there’s so much liquidity out there, we’ve seen…companies come through bankruptcy with ample financing.”
Moyer believes the current environment will “create a lot of efficiencies and productivity gains in the overall economy,” as well as refinancing opportunities through high-yield bonds and Term Loan B loans in 2021 and beyond.
Key risks highlighted by MUFG’s capital markets group for leveraged finance next year include any snags with the Covid-19 vaccine, such as distribution or its medical efficacy -each of which could derail or prolong the economic recovery, and potential issues such as continued deterioration in US-China trade relations and the remote possibility of inflation or a sharp hike in interest rates.
MUFG is one of the world’s largest financial institutions by assets, with approximately $3.3tn.
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