Conducive factors include high market liquidity, low interest rates, accommodative Fed policy and a vaccination against COVID-19
New York, December 14, 2020 – The year 2021 is shaping up to be a strong and supportive one for leveraged finance, led primarily by merger-and-acquisition (M&A) and refinancing activity, according to the Capital Markets group at Mitsubishi UFJ Financial Group (MUFG).
Key members of the group delivered their outlook for leveraged finance to reporters and editors at a virtual MUFG media roundtable earlier this month that featured Jeffrey Knowles, Co-Head of Debt Capital Markets; Grant Moyer, Head of Leveraged Capital Markets; and Art de Peña, Head of Loan Syndications and Distribution.
Accommodative factors for leverage finance heading into 2021
“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,” said Mr. Moyer, citing 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 December 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.”
Mr. de Peña attributes this optimism to “investors…on the bank side [and] the institutional side,” who “give us…more confidence that we head into 2021 in…better…and more stable footing.” He adds: “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.”
M&A and refinancing as key drivers
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,” Mr. 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. As a result, “I think we’ll see higher leverage [in 2021],” Mr. Moyer said, though he noted that in some struggling sectors that have yet to recover from the pandemic—such as retail, travel and hospitality—leveraged buyouts will remain challenging and may entail more elaborate financing structures.
Mr. Moyer added that for companies undergoing bankruptcy, the current credit environment provides an opportunity to refinance debt at lower rates. “One of the things that happens whenever [there’s] an [economic] downturn is [that] companies that were barely hanging on [file for bankruptcy]. [T]hat creates…an opportunity to recycle capital, streamline businesses, make them more efficient, and then create actual capital, investment opportunities and financing opportunities,” he said. “Because there’s so much liquidity out there, we've seen…companies come through bankruptcy with ample financing.”
Mr. 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 a type of financing known as “exit financing,” which allows a company to emerge from bankruptcy and restructure its business for efficiency. Through exit financing, debt owners can become equity owners and, in turn, provide a bankrupted company with capital, he said.
According to Mr. 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. Mr. 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.”
Risks to the outlook
Messrs. Knowles, Moyer and de Peña singled out a number of key risks that, if materialized, could undermine the prospects for leveraged finance next year. They 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; and
- 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.
More dollar-denominated debt issuance in Asia
Mr. 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, he said.
MUFG is one of the world’s largest financial institutions by assets, with approximately $3.3 trillion.1
About MUFG’s Debt Capital Markets group in the Americas
With a traditionally strong foundation in the investment-grade sector, the Debt Capital Markets group at Mitsubishi UFJ Financial Group (MUFG) has continued building out its leveraged-finance capabilities for corporate clients across industry verticals—including private equity sponsors—with expanded coverage of middle-market lending. Today the group provides a full suite of financing and fixed-income advisory services to both private and public markets.
About Mitsubishi UFJ Financial Group, Inc.’s U.S. Operations including MUFG Americas Holdings Corporation
The U.S. operations of Mitsubishi UFJ Financial Group, Inc. (MUFG), one of the world’s leading financial groups, has total assets of $339 billion at September 30, 2020. As part of that total, MUFG Americas Holdings Corporation (MUAH), a financial holding company, bank holding company, and intermediate holding company, has total assets of $164 billion at September 30, 2020. MUAH’s main subsidiaries are MUFG Union Bank, N.A. and MUFG Securities Americas Inc. MUFG Union Bank, N.A. provides a wide range of financial services to consumers, small businesses, middle-market companies, and major corporations. As of September 30, 2020, MUFG Union Bank, N.A. operated 348 branches, consisting primarily of retail banking branches in the West Coast states, along with commercial branches in Texas, Illinois, New York, and Georgia. MUFG Securities Americas Inc. is a registered securities broker-dealer which engages in capital markets origination transactions, domestic and foreign debt and equities securities transactions, private placements, collateralized financings, and securities borrowing and lending transactions. MUAH is owned by MUFG Bank, Ltd. and Mitsubishi UFJ Financial Group, Inc. MUFG Bank, Ltd., a wholly owned subsidiary of Mitsubishi UFJ Financial Group, Inc., has offices in Argentina, Brazil, Chile, Colombia, Peru, Mexico, and Canada. Visit www.mufgamericas.com for more information.
About MUFG
Mitsubishi UFJ Financial Group, Inc. (MUFG) is one of the world’s leading financial groups. Headquartered in Tokyo and with more than 360 years of history, MUFG has a global network with over 2,700 locations in more than 50 countries. The Group has over 180,000 employees and offers services including commercial banking, trust banking, securities, credit cards, consumer finance, asset management, and leasing. The Group aims to “be the world’s most trusted financial group” through close collaboration among our operating companies and flexibly respond to all of the financial needs of our customers, serving society, and fostering shared and sustainable growth for a better world. MUFG’s shares trade on the Tokyo, Nagoya, and New York stock exchanges. Visit https://www.mufg.jp/english for more information.
(1) As of September 30, 2020, at the exchange rate of USD=¥105.8