Loans bankers keenly await ‘a good vintage for M&A’ in 2025

Intertest rates have been at the front of corporate borrowers’ minds in both the UK and Europe, with many refinancing their loans soon after the European Central Bank and the Bank of England began to cut them in the summer.

Economists expect the BoE to deliver another two or three rate cuts in 2025, while the ECB is expected to cut rates four times.

Lower borrowing costs should stimulate the syndicated loan market. Indeed, roughly 70% of bankers surveyed by GlobalCapital about volumes in 2025 expect them to increase, while the rest expect them to remain the same.

“The tone is generally positive,” says Nicolas Rabier, co-head of investment grade finance loan capital markets at BNP Paribas.

“Companies have now largely repaired their balance sheets and put themselves in good stead, and we will see an improved environment in terms of funding markets as rates come down,” says Damien Orban, head of emerging markets, financial institutions and Benelux in loan capital markets EMEA at Bank of America in London.

If lending activity does rise, a major driver is expected to be M&A. “Acquisition financing is going to drive the loan market over the next year,” says Orban. “The reason for that is coming off the back of two years of poor M&A volumes that were significantly impacted by volatility in financial markets, the higher rate environment, and therefore the cost of debt, particularly as we think about companies then having to focus on repairing balance sheets.”

Indeed, the tide is already shifting that way. Syndicated loans to finance M&A have risen by 21% from $118bn in the first nine months of 2023 to $143bn in the same period this year, according to Dealogic.

“We’ve seen many corporates trying to diversify and go to the M&A markets to adapt to the changing world,” says Benjamin Vaissié, head of corporate and acquisition loan syndicate at Société Générale.

“The syndicated loan market is definitely influenced by the level of M&A that could occur in the markets, that’s really the big topic,” he adds. “There’s been a lot of refinancing and jumbo transactions this year, but everybody’s waiting for the comeback of M&A financing.”

The EMEA loan market has rebounded this year, with $317bn of rank-eligible deals signed by November, according to Dealogic, up from $169bn by volume in the same period last year. Nonetheless, there are still obstacles for borrowers and their lenders to clear.

“One may be cost of funds,” says Orban. “The cost of liquidity is something of a challenge. Competition is fierce, and when a transaction may have broken cover publicly you see this come through with bids/rates so unbelievably underwater. It is important for clients to balance this behaviour against the value of the right advice and structure in context of the project and the prior work that has gone in to get to this point of success.”

And when it comes to funding M&A, Vaissié sees “external events [that] could have an impact on the valuation of companies and so could slow down the corporates willing to make those strategic moves” as a risk. “The economic performance of companies will also be strongly looked at, so there’s been a lot of disruption with strong inflation impacting the margin of certain industries,” he adds.

Borrowers also have increasing choices over their sources of capital, given the rise of the private credit industry. Among those surveyed 75% think the competition to lend to investment grade companies from private credit increased this year.

One thing in the syndicated loan market’s favour is its ability to keep operating through spells of market turbulence. “When we look into the future, we’re in an environment where there will still be volatility,” says Orban. “But volatility is now better ingrained into the psyche of management teams, who are more comfortable dealing with it.”

“The corporate loan market is amazingly supportive through thick and thin,” he adds. “Infrastructure is maturing and continues to grow, and leverage market fundamentals are very strong going into 2025.”

Roughly half of survey respondents said that loan margins had tightened this year, while around three eighths said they had remained about the same. The remaining eighth said they had widened but only by a little.

That is not expected to continue next year. Roughly a third of respondents think they will widen a little and 44% believe they will be about the same. Just 6% said they would be much tighter and 18% a little tighter.