Coming M&A wave will be a boon for debt bankers: Credit Weekly

(Bloomberg) — M&A bankers hope Donald Trump’s return to the White House will help bring in more new deals than previously expected. Debt underwriters may also win.

Trump is expected to nominate a new FTC chair to replace Lina Khan, who has blocked a series of acquisitions on antitrust grounds. Her successor may be more friendly to the Grand Alliance.

Many of these may be financed through debt. Additionally, Trump’s business-friendly stance, such as possible lower corporate taxes, could add to the tailwinds already supporting the return of private equity leveraged buyouts.

Meanwhile, borrowing costs are falling in public and private loan markets as the Federal Reserve cuts interest rates.

“Both the syndicated market and the direct market are desperate for transactions,” said Rob Fullerton, global head of leveraged finance at Jefferies Financial Group Inc. “There’s also tremendous liquidity in the loan and bond markets.”

Fullerton said economic conditions are already improving next year as unemployment and inflation levels improve. “Now, with the new government in place, the market is expecting a more business-friendly regulatory environment,” he added. “It will be good for M&A.”

However, there are still obstacles to completing the deal. Valuations for likely targets are high: Stocks soared after Trump’s victory. Buyers generally don’t want to pay top dollar for a company.

Financing costs in the bond market are also becoming increasingly expensive. The Treasury market sold off after Trump’s victory, sending yields to their highest levels in months. The returning U.S. president is expected to support policies such as import tariffs that could fuel inflation. Wall Street economists have lowered their expectations for U.S. interest rate cuts.

Trip Morris, co-head of leveraged finance at Wells Fargo, said: “There has long been hope that there will be more leveraged buyout sponsor acquisition activity. But I don’t know the fundamental challenges surrounding the buying and selling of companies. It’s in a completely different place.”

LBO activity in 2024 has improved from last year. Private equity firms have announced at least $94 billion in acquisitions of U.S. listed companies this year, a 63% increase from the same period in 2023, according to data compiled by Bloomberg.

There is pent-up demand for deals from private equity firms. Promoters need to make their dry powder work by acquiring companies, and they are also under pressure to sell companies to return capital to investors. At the same time, competition among broadly syndicated debt markets and direct lenders is driving down borrowing costs.

Risk premiums, or spreads, are tightening in both the high-yield and investment-grade bond markets, making borrowing cheaper than it would otherwise be.

Investor demand for debt has sparked a wave of leveraged loan refinancings, pushing issuance past $1 trillion this year to a record high.

A Trump victory may persuade companies that have sat on the sidelines since the election to move forward now that it appears antitrust pressure will lessen. For example, Qualcomm Inc. decided to wait until after the November election before deciding whether to make an offer to acquire Intel Corp., Bloomberg reported last month.

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

But it’s too early to know the full impact of Trump’s presidency. Markets are awaiting details on his policies, particularly on tariffs, interest rates and government spending, which could fuel inflation.

But many on Wall Street are hopeful.

Jefferies’ Fullerton expects M&A volume in the second half of 2025 to likely be similar to 2021, with a focus on growth areas such as technology and healthcare. “I think you’re going to see a fair number of huge leveraged buyouts,” Fullerton said.

Listen to Vanguard’s take on junk bonds on the Credit Edge Podcast here.

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

More stories like this can be found at Bloomberg.com