Is there a particular segmentation among issuers on a sector-by-sector basis, or is it mainly dependent on quality and size still?
It is mainly dependent on credit quality, and generally I would say that lenders are sector agnostic. However, one possible exception is the energy space, where lenders appear to be more selective.
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When it comes to the buy side, is there still a ripple effect from alternative or “shadow lenders” taking up investments in certain segments of the market, as more-regulated entities restrict their scope? Where do you see that divide falling?
We primarily see alternative lenders filling voids for companies that cannot access traditional debt markets. Typically these are highly leveraged situations, deep turnarounds, or in asset classes that are not traditional for ABL. We work well with these lenders in providing solutions to our clients. For example, we often couple our ABL revolver facilities with a first or second lien term loan, provided by an alternative lender.
Per PitchBook data, debt portions of US M&A are on the upswing, with the median debt percentage increasing to 56.3%. Are you seeing greater usage amid the lower end of the bifurcation among issuers, or is larger M&A activity driving that demand?
In the small-and medium-cap space, we’re seeing a slight uptick in usage, primarily to fund organic working capital growth. Overall, corporate earnings are strong, and companies are managing their balance sheets well. Firms are being somewhat cautious in undertaking major capital spending programs given current political and policy uncertainty. In the large-cap space, due in part to the strength of the institutional loan and high-yield markets, we’ve seen less usage of the ABL facilities and more companies maintaining significant liquidity levels.
Furthermore, when it comes to debt/EBITDA ratios, they are edging slightly higher after 2016. What are your thoughts as to what’s driving the willingness of businesses to take on more debt in transactions currently?
Despite political uncertainty, there is a favorable economic backdrop and confidence that strong growth will continue. Driven by several factors, including expectations that the dollar will remain soft, companies are forecasting solid earnings. Multinationals are further benefiting from better-than-expected global growth. This is resulting in leverage ratios, when measured by historical EBITDA levels, to ratchet higher. Additionally, despite lever-age ratios moving up, we are seeing deals that are well-capitalized with significant equity checks. Thus, cushions are being created between leverage levels and enterprise values, still providing some measure of protection and stability overall.
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