Strategic Market Insights

M&A Market Executive Summary

• During recent economic disruptions, M&A volume had already started to decrease in advance of the downturn, driven in part by late-cycle market dynamics — yet it recovered quickly when economic conditions improved (see figure below).

Real GDP Growth vs. No. of U.S. M&A Transactions
Sources: Refinitiv, U.S. Bureau of Economic Analysis, WallStreet Research /  View Accessible Version of this chart.

• The small and mid-sized end of the M&A market has generally shown lower volatility during economic disruptions than the mega-deal segment.
• Between 2008 and 2009, closed transactions tended to involve large corporate buyers and readily attained synergies, buyers able to adjust financial structures, highly targeted sales processes, and smaller deals involving founder-owned businesses, tuck-ins and spin-offs.
• Generally speaking, deals that closed in 2010 tended to involve private equity-to-private equity sales of well-run businesses, assets key to the core goals of large corporate buyers, family businesses seeking exit, companies successful at predictable growth, and thinly traded small and mid-cap public companies. We expect similar trends and patterns to occur during the recovery from the current recession.
• For more details, please review Looking Back to Go Forward: What Past Economic Cycles Can Teach Us About M&A in 2020 and Beyond.

IPO & Follow-On Executive Summary

• The S&P 500 dropped 33% in 1Q in light of the COVID-19 pandemic; however, this was followed by a sharp 40% 2Q rise, marking the biggest quarterly gain since 1998 and the largest 100-day rally since 1933 (though still leaving the market down 4% YTD). The rapid recovery from the March bottom was largely driven by unprecedented Fed liquidity measures and hopes of an economic rebound.

Indexed Market Performance Amidst Recent Notable Dislocations
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• In the face of COVID-19, 2Q witnessed a market re-opening characterized by creativity, large scale capital raises and the eventual re-emergence of monetizations and strong IPO activity. Equity issuance commenced in early April led by convertible offerings and marketed follow-ons for companies in need of capital, followed by issuance of secondary shares and then the return of strong IPO activity in June, resulting in an astounding +88% year-over-year increase in overall equity proceeds.
• Select sectors have shown signs of optimism about the opportunities that lie on the other side of COVID-19, but a great deal of volatility is expected as long as COVID-19’s duration and impact remain unknown and corporate earnings visibility is lacking. Institutional investors have been anxious to consider new businesses in this environment, but are quick to expose any weaknesses in the business model given an uncertain outlook.
• Traditional ECM playbooks have evolved in light of recent events with analyst days and roadshows moving entirely to a virtual setting along with condensed marketing processes and an increasing import on “testing the waters” activities. The first wave of IPOs to come to market have been hand-selected and have found terrific success. As a more diverse set of companies attempt to come to the IPO market, it is not yet clear whether the innovative tactics that were well-suited for the initial group of IPO issuers will be as effective as the universe of issuers begins to expand.

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• The second half of the 2020 calendar is likely to get crowded with the upcoming presidential election, which may add a layer of volatility and uncertainty as election-year rhetoric contributes to investor angst leading into the November election.

Annual IPO and Follow-On Issuance


Sources: Dealogic and Factset / View Accessible Version of this chart.

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Debt Capital Markets Executive Summary

• Investment Grade Loans: During the worst of the COVID-19 market disruption, loan spreads gapped out 50-75 bps from pre-COVID-19 levels of L+75-150, and tenors shrunk to within three years, over 90% of which were 364 day liquidity facilities. More recently, spreads have begun to tighten and are trending back to L+100-175; LIBOR floors continue to be a point of discussion; and while floors remain conventional in the market, the levels of the floors have reduced and certain deals have cleared at 0%. Upfront fees are at a premium, particularly on 5 year deals, currently ranging from 3-7 bps per year of tenor. 

Borrowers Looked to Banks for Liquidity: COVID-19-Related Liquidity Financings

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• Investment Grade Bonds: Despite record first half volume of $1.2 trillion (~107% of all 2019), market conditions remain favorable for issuers heading into the second half of the year. Although most issuers have fulfilled their current financing needs, we expect borrowers to opportunistically tap the market to manage upcoming maturities given the attractive all-in yield environment and continued support from the Fed. Deal execution has returned to pre-COVID-19 levels with negligible new-issue concessions and strong order book subscriptions.

Record Bond Volume: IG Volume in 1H20 Surpassed 2019 Total

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• Middle Market: Market receptivity is open and growing, driven by banks' declining loan balances and an anemic supply of new deal opportunities. The key focus for banks continues to be returns, and the second half of the year will see lenders scrutinizing ancillary business in parallel with capital commitments. Lenders are trying to hold onto LIBOR floors when possible, which range from 0 to 50-75 bps on a case-by-case basis, down from as much as 100 bps.
  
• Asset-Based Lending: The asset-based loan market continues to be an attractive source of capital during the COVID-19 pandemic for companies that are looking for structural flexibility, specifically as it relates to potential leverage covenant concerns in existing cash flow facilities. Spreads widened 50-75 bps from pre-COVID-19 levels but seem to have settled in at that range. LIBOR floors of 50 bps are the norm. While deal flow from M&A and refinances are down, investor demand is robust, and a number of borrowers in the retail industry launched transactions.
• Leveraged Pro Rata: For Revolver / Term Loan A facilities, new deals are 100-150 bps wide of pre-COVID-19 levels of L+150-250 and have limited deal flow. Opportunistic refinances at competitive pricing are still off the table at present. Maturity-extension transactions may see an upfront fee with no or modest change to the pricing grid. However, a brand new deal may have to price higher depending on the construct of the bank group, particularly if new relationship banks will be needed to complete the syndication.
• Institutional Loans / High Yield: The Leveraged Loan Index saw TLBs trade at ~76% of par at the March low before recovering to approximately ~90% of par in June. While the risk of further fundamental, default, credit downgrade and pandemic disruptions weigh on investors’ minds, loan market technicals actually lean bullish: The new-issue forward calendar sits at less than $20 billion versus $30 billion to $60 billion pre-COVID-19, limiting supply, and CLOs have begun to price new transactions, creating new buying demand. At the right spread and OID, even some double B and single B borrowers in harder-hit industries are able to raise capital. In high yield, after a hard sell-off in March, the Fed’s significant and unprecedented support caused prices to rally and spreads to compress. June and May set the #1 and #2 monthly volume records of all-time. Looking forward, the market is re-opened to issuers.  

Sources: PNC Capital Markets LLC, S&P Capital IQ LCD, Thomson Reuters Refinitiv, Informa Global Markets, Credit Flow Research

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