M&A and Financing market review and outlook 2024

It also resulted in a period of relative inactivity for corporate M&A, as boards and shareholders waited on the sidelines, for bid/ask spreads to narrow and adjust to the new fiscal environment. 

Whilst inflation does now appear to be falling consistently across the globe, and the peak in interest rates may have been reached, economic vulnerabilities remain, with low growth levels predicted in many major economies for the foreseeable future. That said, we may be at an inflexion point, with an acceptance that a “new normal” phase has been reached with, potentially, more predictable conditions ahead, helped by many economies showing surprising resilience.

As 2024 gets underway, it seems to be a good moment to reflect on where the markets are and where they might be heading. We recently took the opportunity to catch up with our colleagues, Ian Tetsill, Head of Debt Finance Strategy and Chris Halliday, Global Corporate/M&A Partner to hear their views on the outlook for the Corporate market.

So firstly Ian, what type of borrowing activity have you seen in 2023?

2023 was heavily dominated by refinancing activity. Where Corporates may have deferred a full refinancing during the Covid period, many chose to lock down their liquidity and get ahead of their impending maturities due in 2024 and 2025. 

That said, there have been pockets of M&A activity and, when key drivers such as valuations, strategy and pricing have aligned, there has been fierce competition from banks and other lenders to participate in high quality event-driven financings.

In the Corporate sector, bank liquidity has generally remained positive and for strong borrowers with a good credit story, pricing and tenors have remained relatively stable. Weaker credits, or those unable to meet the relevant Bank’s return on capital hurdles or in more challenging sectors, may have seen a reduction in lender appetite, including tenor compression, with 3 and 4 year tenors (plus extension options) returning and some price accretion. 

In the leveraged finance market, again, it’s generally been a refinancing story, and, with increased volatility seen in the public capital markets, there has been a continued drift towards private credit solutions, given the stability, liquidity and appetite those solutions offer. Conversely, in the lower end of the mid-market, bank structures (bilaterals and clubs) have found favour again, largely down to pricing benefits, as leverage levels trended downwards due to serviceability pressures caused by higher interest rates.

The focus on serviceability and cash generation has become fundamental and, when warranted, we have seen more creativity from lenders, particularly in the private credit arena, with PIK instruments and minority equity structures becoming more common. Loan documentation is generally becoming less borrower friendly with lenders pushing back on aggressive adjustments and addbacks more forcefully than seen in previous years.

We are hearing that there is definitely more rigour from credit committees who are setting a higher bar for new funding propositions, and seeking a need for real conviction in due diligence findings. Lenders are increasingly binary in their decision-making, and less likely to commit time and resource to credits which hold low appeal. There is a tilt towards more defensive sectors and to companies who have market leading positions in their area, with the ability to pass on cost pressures. The key question lenders are often asking themselves is: does this business have a future or reason to exist?

And Chris, whilst we note that M&A volumes globally are down by as much as  40% compared to 2022, what type of activity has been most prevalent and what trends have you seen?

Much of the sentiment in the market over the past year has been focused on the fact that volatility tends to make dealmakers more cautious and we continue to see nervousness around valuations and deliverability. 

Whether this is in relation to the current geopolitical landscape, higher interest rates, inflation or navigating tougher stances by regulators, we are seeing corporates take longer to think about transactions and execute them. The international divergence of inflation, interest rates and regulatory positions means that companies are increasingly looking cross border. For example, we are seeing a trend of US buyers increasingly looking into what they see as more attractive European markets, whether this is considering “public to private” transactions due to depressed share prices or private opportunities.

Some are seeing this as an opportune time to drive their preferred terms and take control of a process. Corporates with cash on their balance sheet and no with debt requirement can dominate M&A processes and in some cases complete off-market deals, where the landscape offers an opportunity to snap up targets in a less competitive environment.

Financial Sponsors continue to have capital to deploy but are being selective and sometimes choose to write all-equity cheques with a view to refinancing in the medium term. Deal processes are generally becoming elongated, with more preparatory work required to satisfy internal and external diligence requirements. Sponsors have also preferred to focus more on accretive add-on activity in 2023, rather than acquiring new platforms.

The increasing regulatory burden, both in terms of process and substance, is also one of the biggest dampeners on M&A activity. Governments around the globe are increasingly interested in who holds what assets, borne out by investment screening becoming a routine part of global M&A which can slow down or scupper activity. In addition, energy regulation continues to be on the agenda for legislative bodies and this has had a material impact on activity.

Across sectors, we have seen activity pushed back as many opt to wait until markets stabilise, and therefore pricing settles, before embarking on strategic M&A. 

What are your views and predictions for the market in 2024? Chris, firstly what do you expect to see?

As the market settles in terms of both interest rates and the macro environment, I do expect an uptick in private equity transactions from this historic low base. There is a material backlog of quality assets being prepared for sale, with private equity firms under pressure to deploy capital after a prolonged period of inactivity and others needing to crystallise exits. 

It is reasonable to assume that there will be more distressed acquisition activity in 2024 as certain buyers are able to benefit from the impact others have suffered from the recent years’ economic pressures. 

Venture capital is in a cycle of creativity. The big tech companies have laid off thousands of people and many of these are looking at entrepreneurial careers. It is therefore feasible that lots of new ventures will start looking for fresh capital.

ESG will also remain a focus for the agenda for boards as they grapple to navigate regulatory change and set their strategy for allocating resources to more sustainable activities. Capital providers will also continue to run an ESG lens over all their decisions prior to deployment.

In terms of headwinds, 2024 is set to be the year of elections, with over 40 countries, representing 40% of the world’s population and a larger proportion of global GDP, due to go to their electorate. This could boost or hold back economic activity in some areas as election events approach, and potentially then lead to a recovery as the uncertainty passes.

And Ian, what do you expect from a financing perspective?

Despite the obvious pressures remaining, my sense is that the overall mood amongst M&A and financing professionals seems generally optimistic for 2024. Whilst some remain cautious, many are already very busy looking at new opportunities and mandates.

I expect to see more creativity in deal structuring and types of funding available, as a way of balancing the valuation gap and ensuring that serviceability constraints are mitigated. I also expect interest rate hedging to become an agenda item again as the yield curve falls and Corporates are able to lock into the expectation of falling rates and the certainty to future funding costs and covenant compliance that this brings. 

There is a significant amount of private capital available for the new deal flow Chris alludes to. There is also pent up demand in the public capital markets too with corporates sitting on cash and undrawn loan facilities that, correctly deployed for M&A, could be EPS accretive. 

Private credit will continue to extend its reach and has now earned its place as a mainstream alternative to, or a partner for, the public syndicated and high yield leveraged finance markets for the largest transactions. Lower down the size chain, the private credit asset class is also now finding more homes in companies both with, and increasingly without, a financial sponsor. As with private equity funds, as a result of the very significant fund-raising activity over the last couple of years, there is a need to put money to work to hit investor return expectations.

Whilst this cautious optimism has yet to translate into a surge of deals, many in the market, report that clients are moving ahead with their M&A plans and whilst no-one is predicting a repeat of 2021 levels of bounceback activity, a new normal may be approaching. As a global legal adviser operating right across the market advising both borrowers, lenders, buyers and sellers, we remain ideally placed to help our clients navigate through the opportunities and challenges ahead.