How Lenders Are Impacted by Record-low Interest Rates
October 30, 2015
PitchBook Dealmakers Column
Record low interest rates have been the reality for the last several years. Financial institutions have been pressured to lend, and are sitting on large pools of capital that need to earn returns. Thus, debt facilities for these quality deals are very competitively priced with pre-recession covenant-light structures. In other words, banks are aggressively competing for a smaller number of attractive opportunities. On the whole, banks seem to be more concerned about the leverage limitations being imposed upon them by the regulators than they are about pulling back due to credit concerns. Generally speaking, regulations are impeding banks, but the gap is being filled by non-regulated lenders.
While there is a large pipeline of potential transaction activity, current economic conditions have caused many companies to go to market for the wrong reasons—liquidity, financial performance, or the tax code, for instance. It may be that there are too many deals being marketed with 'hair on them', and too few good-quality companies for sale. Most bank economists believe that the economy will continue to grow at a moderate rate, so there is no recession forecasted in the medium term that could significantly impact corporate profitability. A potential increase in interest rates is, however, a concern in leveraged transactions to the extent they are not properly hedged.