According to Neil Wessan, group head and managing director, CIT Capital Markets, the current state of the capital markets is unclear, with pockets of liquidity and uncertainty regarding what deals can get done. Nonetheless, the Federal Reserve’s interest rate increase has not had a dramatic effect and demand for middle market syndicated loans remains strong.
“The final response from the lending community to the federal leveraged lending guidelines has worked itself through, and, as a result, total leverage has come in quite a bit,” said Wessan. “I think this presents a lot of opportunities for both issuers and investors in 2016. Issuers who need capital and are willing to be prudent about the total amount of leverage they put on will find a strong fit for their companies.”
Looking ahead, Wessan sees the following trends:
Collateralized loan obligation (CLO) issuances have been dramatically affected by the new equity guidelines and have become less active in the middle market and the broader market. At the same time, business development companies (BDCs) have a problem in that most are now trading below net asset value and are pulling back.
So far, the Fed rate increase has not had a dramatic effect on the lending market. Many transactions have LIBOR floors in them, so rate increases haven’t had an effect yet on the cost of funding to the company. The Fed may try to move again on interest rates before the end of this year if lower energy prices do not cause broad, sustained economic problems.
For companies, hedging interest rate risk is still relatively inexpensive. Given the current shape of the yield curve, LIBOR rates could trend up. As such, buying an interest rate hedge can still be viewed as both prudent protection and affordable.
In the middle market, there’s good demand for syndicated loans. In the broader market, there is not. As a result, there have been very few broad-market transactions launched this year. There’s been much more activity in the pro-rata, or bank, market, where activity is likely to continue into the next quarter.