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NEW YORK (Reuters) – The landscape for U.S. high-grade corporate bond issuance aimed at funding mergers and acquisitions has reached a five-year low, primarily influenced by the trade policies of the Trump administration. This downturn presents a dual-edged sword; while it may favor borrowers, it also poses challenges for banks and investors in the market.
Market analysts initially forecasted that the mix of deregulation and tax reductions would stimulate a wave of mergers and acquisitions, generating between $250 billion to $300 billion in investment-grade bond issuance for 2025, a notable increase from the $179 billion recorded in 2024, according to insights gathered from six bankers specializing in debt capital markets. However, heightened economic uncertainty, particularly concerning tariffs on imported goods, has led many corporate executives to pause potential deals as they seek more stability before proceeding. Data from Dealogic indicates that U.S. merger and acquisition activity saw a 3% decline in the first quarter.
Meghan Graper, who oversees debt capital markets globally at Barclays, noted that only $8 billion earmarked for acquisition financing is in the pipeline, a stark comparison to the approximately $100 billion at this time the previous year. This marks the lowest figure since June 2020.
In a broader context, it is anticipated that investment-grade bond issuance will average around $1.65 trillion in 2025, reflecting an increase of about $150 billion year-over-year, as reported by Informa Global Markets.
Daniel Botoff, the global head of debt capital markets at RBC Capital Markets, indicated that he had projected 20% of this year’s issuance would stem from M&A financing. However, he acknowledged that this forecast now appears overly optimistic.
Several financial experts are concerned that a reduction in issuance to fund mergers could lead to tighter credit spreads—the additional yield above U.S. Treasuries that issuers offer investors. If this trend persists, it could adversely affect financial institutions, potentially resulting in losses and job cuts within the sector.
Daniel Krieter, a strategist at BMO Capital, revised his expectations for total investment-grade volumes, suggesting that they might settle around $1.5 trillion for the year, aligning with the totals from 2024, a year noted for its high issuance activity.
Despite the influx of nearly $1 trillion into the market from interest payments and bond maturities anticipated for this year, there are concerns that the current volume may not adequately satisfy investor demand. These funds are largely expected to be reinvested as investors seek to capitalize on the relatively high yields associated with top-rated bonds, especially in light of anticipated interest rate cuts.
Recent trends show credit spreads have tightened by nearly 6 basis points since reaching broader fluctuations back in March, according to ICE BAML data. Presently, credit spreads stand at 91 basis points, just shy of 14 basis points from their lowest levels over the past decade.
Experts suggest that if merger and acquisition activity fails to revive, credit spreads might remain tight or decrease further, despite any potential economic slowdown. Edward Marrinan, a macro credit strategist at SMBC Nikko Securities, expressed his view that while growth is likely to decelerate due to ongoing trade and tariff policies, an imminent recession does not appear likely.
On the issuance front, expectations have dramatically shifted. Earlier in the year, there were signs of optimism with significant deals surfacing in the market. In March, for instance, investment-grade companies raised nearly $49 billion for acquisitions, featuring prominent transactions such as Mars’s substantial bond offering to fund its acquisition of Kellanova and Synopsys’s efforts to finance its purchase of Ansys.
Despite these initial successes, Graper highlighted a sharp decline in the activity pipeline, suggesting that market volatility has dampened deal appetite and made potential buyers more cautious about meeting sellers’ price expectations.
According to Sandeep Desai, co-head of leveraged debt markets at Deutsche Bank, the uncertainty surrounding the macroeconomic environment has led to a reluctance among buyers to engage in transactions. This delay in the announcement-to-financing timeline raises concerns, particularly that new M&A transactions requiring financing must be initiated in the coming months. Victor Forte, head of investment-grade capital markets at Mizuho, emphasized this point, noting that the current atmosphere of unpredictability is further complicating the financing landscape for mergers and acquisitions this year.
Source
finance.yahoo.com