Credit crunch affecting M&A deals for targets and acquirers | Jobi Cool


The high interest rates currently available on the safest types of corporate debt are both an incentive and a barrier to deals, with different paths forward for buyers and sellers, investment experts said recently.

Companies facing debt-heavy balance sheets may be more willing to accept private equity takeovers or other deals, in part because of weak demand for riskier types of debt under current credit conditions.

It is also more expensive for buyers from either the corporate world or private equity to buy businesses, due to higher interest rates on debt.

“It is very difficult to make leveraged buyouts work … on these borrowings, [but] that doesn’t mean it can’t work,” said Greg Olafson, co-chairman of alternatives at Goldman Sachs Asset Management, which handles alternative investments outside of traditional stocks and bonds for Goldman Sachs Group Inc. GS,
-0.14%.

Speaking to the media about the firm’s investment outlook for 2023 on Monday, Olafson said the firm views private lending as one of six direct investment avenues the firm offers: private equity, growth equity, private debt, infrastructure, real estate and sustainability. .

Borrowing costs for private equity companies have often risen to 700 to 750 basis points above the federal funds reference rate, up from 500 to 550 basis points before.

“You get paid well to be a lender these days,” he said.

Also read: Traditional 60/40 strategy may start working again for investors, but ‘restraint swing can be scary,’ says Goldman executive

Ashish Shah, Chief Investment Officer, Public Investments, said overall lending activity will continue to decline from the bull market years before 2022, but noted that investment-grade financing remains available to buyers.

“It may not be as open as it used to be, but these buyers are still very much in the capacity to finance a business that is growing,” Shah said. “I think what you’re going to see is actually value creation going in the opposite direction, with smaller companies that have worse credit quality being squeezed out by larger companies, especially where they have strategic value.”

One example of this trend is the $2 billion acquisition of United Rentals Inc. Ahern Rentals Inc.’s URI
-2.17%
earlier this week.

The deal came after Ahern Rentals pulled out a $550 million debt swap in late August that offered public bond investors 7.375% interest.

United Rentals on Wednesday posted $1.5 billion of first lien debt maturing in 2029 to finance the acquisition of Ahern Rentals, according to a LevFin Insights report. The 6% notes are priced at par, the report said.

Neither United Rentals nor Ahern Rentals responded to an email from MarketWatch asking if Ahern’s debt deal helped ignite a relationship between the two rental companies.

Eric Rosenthal, head of the leveraged finance group at Fitch Ratings, said Ahern Rentals had topped the debt research firm’s list of likely defaulters for the URI acquisition.

“It will be interesting to see if Ahern was a one-time move or if there will be more deals like this that have been heading into default,” Rosenthal said.

Overall, CCC or junk-rated debt deals have been few and far between in 2022, but the deals that have been struck averaged around 8.4% interest this year, up from around 6.9% in the corresponding period so far this year 2021.

Also read: Goldman Sachs’ private equity business has been a “black box,” but now it’s opening up

Maria Vassalou, chief investment officer, multi-asset solutions, said high inflation, slow growth and rising interest rates create a challenging environment for investment.

“To be able to manage this situation, we need to be dynamic and therefore … passive of any kind.” [of investing] doesn’t really work,” Vassalou said. “It also means that at this very high time[ly] volatile market that we’ve seen … there was a lot of movement, and movement creates opportunities for stock picks and security picks.”

Overall, Goldman now has about $432 billion of alternative investments under supervision, of which the direct-reserve firms account for more than $220 billion.

Goldman counts more than 1,000 investors in 17 countries in its options business.

Olafson said the team at Goldman expects this year’s key trends of rising interest rates, economic uncertainty, heightened geopolitical risk and price volatility to continue into 2023.

Also read: Goldman Sachs raises $9.7 billion for M&A deals



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