NEW YORK, July 7 (Reuters) - US syndicated loan issuance of US$1.22trn in the first six months set a new half yearly record as lower-rated companies repriced higher-cost debt, boosting bank fees to an all-time half year high.
Nearly three-quarters of all syndicated loans in the first six months were used to refinance existing debt, driving total fees to a record, even though refinancing is less lucrative than new loans backing mergers and acquisitions (M&A) .
“There were simply a lot of low-fee repricing and refinancing deals. These transactions boost the volume numbers, but don’t have the same impact on arrangement fees as new-money, acquisition finance loans,” said Jeff Nassof, a director at Freeman Consulting Services.
Issuance by ‘junk’ rated companies refinancing or repricing to cut borrowing costs and lock in cheap debt before interest rates rise pushed US leveraged lending to a first-half record of about US$732bn, Thomson Reuters LPC data shows.
Bank fees of around US$6.3bn from underwriting leveraged loans in the first half set a new half year record and were 65% higher than the same time last year, according to Freeman Consulting, which has been tracking this income since 2000.
The jump in fees for leveraged loans offset falling fees on the US$854m of investment-grade loans arranged during the first half, which is the lowest half year issuance since the second half of 2013.
The volume of loans backing mergers by higher-rated companies slid 3.5% from the same period last year as the market awaits details of new highly anticipated US tax and trade policies.
“On both the leveraged and investment-grade side, M&A has been fairly weak compared to 2015 and 2016, when there were more large-scale deals that relied on the capital markets for debt financing,” said Nassof.
“For leveraged deals, private equity acquirers have been priced out of the market,” he said. “On the investment-grade side, major corporate acquirers are still on the sidelines as they digest the transformational deals they made last year, and wait for clarity on tax reform.”
In the second quarter, only one acquisition loan supporting an investment grade merger topped US$5bn – the US$15.7bn bridge loan for US medical supplier Becton Dickinson’s purchase of medical technology company C R Bard, Nassof noted.
This is the lowest number since the start of 2014 as there are usually an average of 3.5 deals of at least this size per quarter, he said.
HOME OF THE BRAVE
The dip in M&A dealmaking is due to the absence of detail on new tax and trade policies, rather than a lack of lender or investor appetite, said executives, strategists and bankers, as debt market conditions remain positive.
The timing of legislative changes pledged by the Trump administration was pushed back after efforts to repeal and replace the Affordable Care Act, commonly known as Obamacare, failed earlier this year.
“Clearly it’s not a lack of capital, that’s not the constraint,” said Ravi Saligram, chief executive officer of Ritchie Bros., a global auctioneer of industrial equipment.
The companies that are venturing into large takeovers are those expecting less regulatory pushback, or are eager to grow by acquisition when organic growth is stunted, bankers and strategists said.
Antitrust rulings have also curbed M&A business after scuttling two major tie-ups in the insurance industry earlier this year.
The pace of corporate mergers is widely expected to pick up once there is more evidence that planned tax and trade changes are gaining traction.
The possibility that guidelines curbing leveraged lending could be rolled back could also mean more new issuance, and fee income for banks going forward.
In the meantime, the heavy wave of refinancing is helping to boost banks’ profits while new-money lending remains light.
Fees on business including M&A advisory, equity and bond underwriting as well as syndicated loan arrangement jumped 20% in the first half from the same period last year to almost US$24bn, according to Freeman Consulting.
This was the highest overall investment banking fee pool since the first half of 2015. (Reporting by Lynn Adler; Editing By Tessa Walsh)
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