Coming M&A Wave Will Be a Boon For Debt Bankers: Credit Weekly

(Bloomberg) — Mergers and acquisitions bankers are hopeful that Donald Trump’s return to the White House will help bring even more new deals than previously anticipated. Debt underwriters could win too. 

Trump is expected to nominate a new chair of the US Federal Trade Commission to replace Lina Khan, who has blocked a series of acquisitions on antitrust grounds. Her successor will probably be more friendly toward big combinations.

Many of those are likely to be debt-funded. In addition, Trump’s business-friendly stance, such as likely lowering corporate taxes, could add to tailwinds already supporting the return of private equity leveraged buyouts.

Meanwhile borrowing costs are falling in public and private loan markets alongside the Fed’s interest-rate cuts. 

“You’ve got syndicated and direct markets that are desperate for deals,” said Rob Fullerton, global head of leveraged finance at Jefferies Financial Group Inc. “You’ve also got tremendous liquidity in both the loan and bond market.”

The economic environment was already positive going into next year thanks to improving unemployment and inflation levels, Fullerton said. “Now with the new administration, the market is expecting a more business-friendly regulatory environment,” he added. “This will be good for M&A.”

There are still obstacles to getting deals done, though. Valuations of possible targets are high: equity markets surged following Trump’s win. Buyers typically don’t want to pay the top price for a company.  

Financing is also getting more expensive in bond markets. A selloff in the Treasury market after Trump’s win pushed yields to their highest level in months. The returning US president is expected to back policies such as import tariffs that can fuel more inflation. Economists across Wall Street have dialed back their expectations for US interest rate cuts. 

“There has been a hope for a long time now that there would be more LBO sponsor acquisition activity,” said Trip Morris, co-head of leveraged finance at Wells Fargo & Co. “But I don’t know that the fundamental challenges around the buying and selling of companies is in that different of a place.” 

Leveraged buyout activity has already been improving in 2024 from last year. Private equity firms have announced at least $94 billion in takeovers of publicly-traded US companies this year, up 63% from the same period in 2023, according to data compiled by Bloomberg.

There is pent-up demand among private equity firms to do deals. Sponsors need to put their dry powder to work by buying companies, and they’re also under pressure to sell companies to return capital to investors. Meanwhile, competition between the broadly-syndicated debt markets and direct lenders is driving down borrowing costs. 

Risk premiums, or spreads, have been growing tighter in both the high-yield and investment-grade bond markets, making borrowing a little cheaper than it might have been otherwise.

Investors’ demand for debt has helped unleash a wave of refinancing in leveraged loans, pushing issuance for the year above $1 trillion, a record figure.  

Trump’s victory may convince companies that had been sitting on the sidelines until after the election to move forward, now that it appears there will be less antitrust pressure. Qualcomm Inc., for example, decided to wait until after the November election to decide whether to pursue an offer to buy Intel Corp., as Bloomberg News reported last month.

Private equity firms could also benefit from a more pro-Wall Street, lighter regulatory environment. 

But it’s still too early to know the full implications of Trump’s presidency. The market is waiting for specifics on his policies, especially around tariffs, interest rates, and government spending, which could all increase inflation. 

But many on Wall Street are hopeful. 

Jefferies’ Fullerton expects the second half of 2025 could resemble the M&A volumes of 2021, focused on growth sectors such as technology and healthcare. “I think you’re going to see a fair amount of jumbo LBOs,” Fullerton said. 

Listen to Vanguard’s thoughts on junk bonds on the Credit Edge podcast here.

–With assistance from Neil Callanan, Ben Scent and Yiqin Shen.

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