In conjunction with the 25bps interest rate hike in September,
the Fed, taking a hawkish stance on monetary policy, raised its
economic outlook and dropped the "accommodative" language
that has long been a component of its formal statement.
In August, the Bank of England (BOE) raised interest rates, citing
a strong labor market and credit growth. UK economic growth
rebounded in the second quarter following a slowdown in the first
quarter, which the BOE attributes largely to weather. One of the
most significant risk to economic growth remains Brexit
negotiations between the UK and European Union.
Private debt and equity dry powder continued to build, supporting
higher leveraged buyout (LBO) purchase multiples and lower credit
spreads. This trend may continue to result in private credit funds
and direct lenders gaining market share from banks - despite
loosening regulations.
Lending standards have remained more rigorous in the lower
middle-market (<$25M EBITDA), where total leverage is largely
holding below 6x and financial covenants remain intact (i.e., a
limited number of covenant-lite or covenant-loose transactions). At
the same time, we note diminishing underwriting standards at the
upper end of the middle-market (>$25M EBITDA), which we
attribute to the abundance of available capital (a result of
collateralized loan obligations (CLOs) and other non-direct
origination sources).
Rising borrowing costs have resulted in a significant decline in
refinancing activity year-to-date (YTD), particularly in the third
quarter. There has been a significant shift toward opportunistic
financings for growth-related purposes and leveraged
recapitalizations. As economic conditions continue to stoke M&A
related activities and a hawkish Fed focuses on raising rates, we
anticipate that the trend away from refinancings will likely
continue.
Capital Markets Insights – Late Fall 2018
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