Reuters | LPC: U.S. syndicated loans initially shrug off Trump historic upset
US syndicated loans are little changed and new deals in the queue are still expected to launch as markets start digesting Donald Trump’s surprise presidential election win.
Longer-term views hinge on the new administration’s tactics for financial regulation and ripple effects for inflation, markets volatility and interest rates, investors and bankers said.
Sector analysis will be critical, based on eventual policy changes impacting everything from healthcare and the environment to commodities and technology, they said.
“In conversations with our leading investors, we see no indications of material impact to the loan market,” said Jeff Cohen, head of US loan capital markets at Credit Suisse. “Over the longer term, to the extent that Trump’s policies are inflationary, we could see even greater demand for floating-rate investments.”
Floating-rate loan investors and bankers said they are encouraged by a significant recovery in US stocks from deep overnight losses, though they remain alert for volatile conditions and lingering uncertainties.
“We are not seeing any wholesale pulling of deals, and no one is pulling or cancelling bank meetings,” a middle market lender said. “There is still a ton of cash, and I don’t think there is any forced selling.”
Lender commitments for a number of loan deals are due over the next two weeks. The biggest is a US$3.87bn credit facility backing the Bass Pro Shops purchase of fellow sporting goods retailer Cabela’s Inc.
US syndicated lending for mergers and acquisitions (M&A) was already running at a reduced pace this year, as markets contended with uncertainties tied first to the United Kingdom’s stunning vote to exit the European Union – known as Brexit – and then to worry about the US election outcome and Federal Reserve policy.
At US$1.55trln this year through November 2, US syndicated loan volume was 8% lower than the same period last year and the lowest since 2012, according to Thomson Reuters LPC.
Trump’s overnight victory took the markets by surprise sending US stock futures and dollar futures down sharply while safe havens like gold or the Japanese Yen soared. The markets calmed down after the opening and stocks rallied.
“I, like many, am surprised by the result; I fully expected more of a drop in the market so I’m doubly surprised,” a senior investment-grade banker said.
“The early read is I don’t think it’s going to have much of an impact,” he said. “Banks will remain eager to pursue deals resulting from whatever M&A unfolds from here on in.”
PAIN AND GAIN
While demand for floating-rate assets could mount if inflation and rates rise, pain and gain will be felt in various sectors depending on how new policies unfold.
Trump has advocated repealing the Affordable Care Act (ACA) and eliminating the Dodd-Frank Act. The president elect has also vowed to change international trade agreements.
“While a reduction in regulatory compliance costs would bolster bank earnings, reduced oversight and a roll-back of requirements would also result in a weakening a of banks’ capital and liquidity positions, a negative from a credit perspective,” Moody’s Investors Service wrote in a Wednesday report.
Policies that disrupt the flow of goods and services between the US and its trading partners, meantime, would be negative for sectors including autos, oil, technology, Moody’s said. On the flip side, it would be positive for industries facing severe import competition, such as steel and manufacturing subsectors, the rating agency said.
Removing the ACA, meantime, could be a long-run positive for health insurers by increasing pricing and underwriting flexibility, analysts and loan market participants agree.
“The healthcare sector will see an impact – it will throw ACA into disarray,” one loan trader said. “Pharma names like Valeant, Endo and Mallincrodt are doing better. Valeant, which is a bellwether, is up 75bp from yesterday.”
However, any reduction in the number of insured individuals would have credit negative implications for public and private healthcare providers and medical device manufacturers, Moody’s said.
QUEUE THE DEALS
There is a temporary lull in loan deal activity Wednesday as markets hash through the implications of Trump’s victory and monitor market swings.
“Some meetings scheduled for today or tomorrow may be delayed by a few days to allow accounts to regain focus,” said Cohen. Ultimately, however, “it’s very unlikely we’ll see many postponements.”
The roster of at least a half a dozen deals already circulating in the market, in addition to the Bass Pro Shops loan, includes financings in the software, packaging, water treatment and food and beverage sectors.
Among the largest, lender commitments are due November 17 for a US$2.1bn cross-border leveraged deal to support contact center software company Genesys’ purchase of call center cloud services company Interactive Intelligence.
Meantime, in the midst of the election results, lenders on Wednesday announced that retail shelf-edge marketing company Vestcom International will shop a US$375m loan to back its acquisition by Charlesbank Capital Partners.
Investors are still happy to look at the deals in market, as well.
“There has been a lot of cash on the sidelines leading up to the election, and we saw that liquidity dynamic play out in the Brexit-like overnight reactions in markets,” said Mark Okada, co-founder and chief investment officer, Highland Capital Management. “Now, investors should be prepared for much of that capital to get put to work.”
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