Daily News: August 21, 2013

KPMG: Executives Expect Lending Environment to Improve

According to a recent survey by KPMG, executives believe the lending environment will continue to improve for businesses in 2013, with more than 60% anticipating that their businesses will be able to readily access credit throughout the remainder of the year.

“Supply and demand imbalance has set off a wave of opportunistic deals – primarily refinancing, re-pricing, and dividend recap deals. Issuers and private equity sponsors, especially, continue to take advantage of strong liquidity in the market,” said Ray Kane, co-head for Capital Advisory, KPMG Corporate Finance.

Seventy-three percent of respondents plan to increase their business’ capital, with a quarter planning to refinance their current loans on more favorable terms by the end of 2013. Additionally, more than half of the executives anticipate that refinancing could drive activity in the credit markets this year. Corporate transaction activity (18%), private equity funded leveraged buyouts (13%), and restructurings (12%) could also serve as catalysts for increased activity.

“Historic levels of cash in credit fund managers’ portfolios, as a result of both individual and institutional searches for yield, are driving bank and bond prices lower. Although companies are taking advantage of low rates and focusing on efficiently refinancing their current portfolio, those considering M&A remain reserved and continue to hold onto their assets,” added Kane.

Half of those surveyed expect leveraged loan yields to remain the same throughout 2013; a third expects yields to increase, and 15% anticipate that yields will decrease. “What could ultimately determine the direction of yields throughout 2013 is market participants’ perception of the government’s decision to change current monetary policy,” said Kane.

Additionally, a third of respondents indicated that rate increases – as a result of a tighter monetary policy or an improved U.S. economy – would have the greatest impact on the leveraged loan market. Twenty-seven percent anticipate that impact from capital providers, as opposed to deteriorating credit standards, would drive yields lower; 24% cited that continued low default rates will cause yields to decrease.

According to respondents, the biggest risk to the credit environment for the remainder of 2013 would be a bubble-like environment resulting from a potential demand for yield (28%), with geopolitical instability (23%), inflation (23%), and a loosening of credit standards (14%) also cited as potential credit market risk factors.

Industry executives had conflicting opinions on whether ongoing regulatory reforms in the banking industry would impact the credit markets. Forty-six percent expect little to no change, but 42% expect the cost of raising capital to increase, causing businesses to move capital overseas. Only 12% of respondents expect a decrease in the cost of raising capital throughout the remainder of the year.