Lending Markets: Laissez les bons temps roulez… and for how long….?
Most of our corporate clients know that the markets for credit have been gaining strength since 2010. As we turned the corner to 2014 the market was very borrower-friendly, but as we look ahead to 2015 there are some clouds on the horizon that are primarily regulatory and have more to do with bank capital than with borrowers. This does not always jibe with the impressions many of our CFO and Treasurer clients take away from their own meetings with the banks, because, especially with strong credit profiles, commercial bank appetites are still high.
What does this mean, in the wake of massive refinancing and issuance in 2013-4? If your company has NOT refinanced or extended its senior credit agreement, now remains good time to do so. If proforma leverage is not expected to breach the 3.75 level that triggers the leveraged lending guidelines, covenants are more relaxed, baskets for acquisitions are more relaxed, and pricing is still very favorable when compared with the past 10 quarters or so. Tenors, which are widely expected (including by us) to begin to feel the impact of tougher capital requirements, are still holding firm at 5 years for strong credit profiles with good earnings histories.
Companies can also benefit from the increased competition for banking transactions from the non-banks, which are the main beneficiaries of the tighter regulatory environment for commercial banks. Although the private placement markets and the funds have their own portfolio quality requirements, those generally are much less stringent and are not focused on capital and liquidity the way the banking regulations have been. The depth and breadth of the alternatives available to corporate borrowers continues to be impressive, and in the investment grade market the movement away from the banks and into the bond markets is demonstrable ( stats?). Given current market volatility, identifying a window for issuance, rather than a date certain, is a wise strategy.
High yield markets, which did experience some choppiness in 2014 (as will always be the case with the more leverage-sensitive markets), have largely recovered, although they will be more volatile than either the bank markets or the investment-grade bond markets.
So if your company is levered, high yield and term B markets may provide attractive options. If a first-time issuer, probably a minimum issue size of $200-$250MM would be necessary to achieve best execution and market liquidity in the high yield market. If that is not achievable, terms and rates may begin to erode.
For now, let the good times roll…..for borrowers, and read on for more of the possible clouds on the horizon.