According to the capital markets group at MUFG, 2021 is projected to be a strong year for leveraged finance led by merger and acquisition and refinancing activity.
Jeffrey Knowles, co-head of debt capital marketsat MUFG; Grant Moyer, head of leveraged capital markets at MUFG; and Art de Peña, head of loan syndications and distribution at MUFG delivered their outlook for leveraged finance to reporters and editors at a virtual MUFG media roundtable earlier this month.
“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,” Moyer said.
Moyer cited this year’s record-high issuance of more than $400 billion, as well as the BofA Merrill Lynch U.S. High Yield Index’s record-low yield of 4.5% on Dec. 4, which surpassed the previous low of 4.9% in June of 2014.
“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 said.
de Peña attributes this optimism to investors on the bank and institutional sides who provide more confidence as the industry heads into 2021 with better and more stable footing.
“We’ve had solid demand for leveraged finance continue, and we’ve had a … conducive Federal Reserve that’s providing a lot of support and backstops to some of these investors,” de Peña said.
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.”
Moyer noted that in some struggling sectors that have yet to recover from the COVID-19 pandemic (such as retail, travel and hospitality) leveraged buyouts will remain challenging and may entail more elaborate financing structures.
“One of the things that happens whenever there’s an economic downturn is that companies that were barely hanging on file for bankruptcy. That creates an opportunity to recycle capital, streamline businesses, make them more efficient and then create actual capital, investment opportunities and financing opportunities,” Moyer said. “Because there’s so much liquidity out there, we’ve seen … companies come through bankruptcy with ample financing.”
Moyer cited examples of companies that, in the course of bankruptcy, availed themselves to asset-based lending (which is secured by collateral such as inventory and receivables) and to exit financing, which allows a company to emerge from bankruptcy and restructure its business for efficiency.
According to Moyer, 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.
de Peña added that the current supportive environment for refinancing is “helping push back the maturity walls that we would have normally seen in 2022 and 2023,” and that if liquidity remains abundant, then “default rates should remain relatively benign.”
Knowles, Moyer and de Peña singled out a number of key risks that, if materialized, could undermine the prospects for leveraged finance next year. Those risks include:
- A COVID-19 vaccine snag, such as a problem with the vaccine’s distribution, the supply chain that makes its production possible, or its medical efficacy — each of which could derail or prolong the economic recovery
- Continued deterioration in U.S.-China trade relations
- The remote possibility of inflation or a sharp hike in interest rates, which would erode bond values and raise particular concerns for longer-maturity debt.
Moyer expects greater issuance of U.S. dollar-denominated debt in Asia due to higher expected acquisition activity as well as the prevalent expectation that the U.S. dollar will continue to decline and thus become a more attractive currency for overseas companies in which to issue debt.
“I do think we’ll see more term loan Bs and high-yield bond activity in Asia,” Moyer said.