Merger and Acquisition Upswing Stalled by Interest Rate Uncertainty
Amidst improved access to affordable financing for corporate borrowers, a prolonged dip in mergers and acquisitions persists due to lingering uncertainty surrounding interest rate direction, according to Christina Minnis, Goldman Sachs Group Inc.'s global head of credit and asset finance.
Recent indicators of persistent inflation in the US have clouded expectations for an imminent easing of monetary policy by the Federal Reserve. Interest rates, which influence corporate earnings and valuations, play a crucial role in determining the appetite of buyers and sellers to engage in M&A сделка.
"Prolonged elevated rates directly correlate with valuations, creating challenges," Minnis noted. "Sellers anticipate relief from rate hikes."
US inflation data released earlier this week reported the highest monthly increase in over a year, pushing the annual rate to 3% and casting doubts on near-term Fed rate cuts. However, a decline in US retail sales on Thursday hinted at a softening consumer economy.
Minnis explained that despite the hazy interest rate outlook, buoyant credit markets have allowed borrowers to restructure debt and fund acquisitions at reduced costs. "We recorded five leveraged buyouts in January with SOFR+300 or better," she said, referring to the leveraged loan benchmark known as the Secured Overnight Financing Rate. "Such low spreads have been achieved by only 13 LBOs in the past decade, signaling favorable financing conditions for sponsors."
Healthcare data platform Cotiviti, backed by KKR & Co., raised $2 billion in incremental loans to facilitate its acquisition of Edifecs, paying 2.75% over the benchmark.
Minnis, whose team led the Cotiviti financing, emphasized that ongoing uncertainty about interest rate direction could hamper a potential uptick in M&A activity. "Inflationary readings in February that exceed expectations would make it challenging to absorb a further tightening cycle," she said.