A brutal 2003 skewered loan investors with two painful prongs: a mass of repricings and the absence of new money. But 2004 is shaping up to be a kinder year with an expected increase in M&A from sponsors and corporations. M&A activity will be strong in 2004 due to the fact that the underlying economic environment is conducive and the loan market is very strong, according to David Juge , head of loan syndications, with UBS . "We will begin to see more corporation-to-corporation M&A activity and continue to see sponsors be active as buyers, [which is] a major change for 2004 that began during the fourth quarter of 2003," he added. Sponsors will be prevalent across all sizes of transactions, added Eric Lloyd , head of loan syndications with Wachovia Securities . "I think you are going to continue to see sponsor transactions vary in size from $100-200 million buyouts to billion plus buyouts," he added. Some major transactions that are set to hit the market include the financing backing Code Hennessy & Simmons ' acquisition of AMF Bowling Worldwide , The Blackstone Group 's E 3.1 billion buyout of German chemical company Celanese and the $2.6 billion acquisition of Time Warner 's Warner Music Group by an investor group led by Thomas H. Lee Partners , Edgar Bronfman Jr. 's Lexa Partners , Bain Capital and Providence Equity Partners .
Issuers are also confident that the improving economy will be a boon to the market. "The overall strength in the economy, lower credit risk and strong economic outlook imply that it should continue to be a very good lending environment for banks and an environment in which they are willing to be aggressive at supporting companies and providing credit," said Bob Dahl , managing director for The Carlyle Group .
Bankers expect the first two months of the year to be very busy with both previously announced deals set to launch and new issue. "We have a pretty significant backlog ready to be launched beginning the first week of January," Juge said. Wachovia expects to announce several deals this week, Lloyd noted.
Curtains For Repricings?
The repricings that were predominant in 2003 should taper off in 2004, according to Lloyd. "I think there will be a large percent of leveraged recaps, but pure repricings should taper off," he stated. "We don't have a significant number in our pipeline. I think there will be more new money deals as you look out to 2004."
Juge believes repricings will continue in the short term given the current strength of the loan market. "Once new issue volume picks up, coming from the M&A pipeline, we will see less of the repricings," he added. One loan manager agreed that the repricings should be coming to an end, noting that investor backlash on a number of deals late last year was a positive sign. He added, however, that there is still a lot of cash to put to work.
Who's Buying?
The current price points are not very economic for certain kinds of vehicles, Lloyd said. But other bankers believe the CLO market is still open. While spreads have tightened, bond prices also tightened, one banker said. "I don't think they've been pinched as badly as some might think," he noted. "Raising funds in the CLO market is still very attractive."
"We'll see banks start to look to book assets more aggressively in 2004 and 2005 than 2003," Lloyd added. In addition, there are a number of overall asset managers who look at corporate loans as an investment and asset class. "Wachovia has recommended corporate loans as a place to invest assets in 2004," Lloyd said. "The way to do that is to go through funds. It's a way of getting exposure at a retail level to corporate loans as an asset class."