U.S. loan market unfazed by looming political stalemate

NEW YORK, Nov. 9 (LPC) — The U.S. syndicated loan market is bullish on its ability to maintain its record lending pace despite the looming political stalemate in Washington after Democrats regained control of the House of Representatives and that Republicans held the Senate in the Nov. 6 midterm elections.

The business-friendly tax relief and deregulation seen in the last two years of the Trump administration is unlikely to be undone and further drastic policy changes are also unlikely with a divided Congress, bankers and officials said. investors.

A bipartisan agreement on billions of dollars in infrastructure spending could boost already strong U.S. bank lending as new leaders on both sides of the aisle cite more infrastructure projects and cutting drug costs as top priorities .

President Trump previously asked Congress to authorize about US$1.5 billion in infrastructure projects, though the plan never passed.

Syndicated loans in the United States broke records in the first nine months of the year, with $1.9 billion in loans issued to finance mergers and acquisitions, leveraged buyouts, dividends and for refinancing debt, according to LPC.

New checks and balances from a divided Congress should have little impact on a strong US loan market. Banks are still willing to lend and investors have strong demand for floating rate loans in a rising interest rate environment

“Shared congressional control should provide a bit more certainty. Less new, potentially business-friendly, regulatory legislation will be enacted, but what has already been passed will not be reversed in the next two years,” said Lauren Basmadjian, senior portfolio manager at Octagon, credit investment adviser .

U.S. regulators eased guidelines for lending to highly indebted businesses earlier this year, easing constraints put in place in 2013 to limit risky lending that could cause systemic problems and lead to another financial crisis.

The amount of leverage or debt used by companies in repurchase agreements has increased in response, drawing criticism from regulators around the world but little action.

“There could have been more deregulation if Congress had remained all-Republican and we may have seen some pushback from deregulation if the Democrats controlled both (chambers), but instead it looks like we will be stalled for a while,” Basmadjian said.

A slower pace of change on the regulatory front could be positive for the lending market, said a senior investment-grade banker, as lenders prefer a more stable and predictable political environment.

“You don’t want liberals or conservatives to destroy what the other side has done after every election,” he said. “Both sides seem to have radicalized.”

The election went as planned, giving the US stock market an initial note of confidence and also setting a positive tone for the loan market. The three major stock indexes – the Dow Jones Industrial Average, the Nasdaq and the S&P 500 – rebounded more than 2% on Wednesday after falling sharply in October.

The loan market will continue to take inspiration from the stock market, a leveraged financial banker said, as bankers and investors watch how new Washington stocks unfold under the new Congress.

Special Counsel Robert Mueller has yet to present the results of his investigation into Russian interference in the 2016 US presidential election and possible collusion between Moscow and the Trump campaign. His report could determine whether President Trump will be impeached or not.

“If there’s an impeachment, it won’t be good for the market,” the leveraged financial banker said. “If there’s an attack on the tax plan, which I don’t think is going to happen, that wouldn’t be great for the market.”

MEASURED PACE

Any policy changes in the US are now expected to be gradual, which should keep the investment grade and leveraged loan markets on track and unlikely to dampen M&A activity, said bankers and strategists.

“Predictability is a relief for the market,” said the senior investment grade banker. “I don’t think it will necessarily boost lending, but surprise results may have had the opposite effect if you were a company looking to buy a competitor or enter the market.”

U.S. Senate Republican Leader Mitch McConnell said Nov. 7 that senators would likely prioritize infrastructure, Obamacare fixes and prescription drug prices, but Medicare and Social Security changes were unlikely and that any new tax laws would require bipartisan support, Reuters reported.

Nancy Pelosi, the Democrat likely to be the next House Speaker, has meanwhile pledged to protect health care while working to lower drug prices.

Although both sides agree that healthcare costs need to come down, it remains to be seen if there can be agreement on how to address these changes.

Bipartisan support for lower drug prices could hurt some pharmaceutical companies while other health care companies could benefit, as the repeal of the Affordable Care Act, known as Obamacare, is considered unlikely.

A split congressional deal on infrastructure spending could bring winners among industrial companies, but lenders remain cautious for now.

“A large expenditure on an infrastructure project would benefit industrial, logistics/transportation companies, there could be multiple industries that would benefit. But I am skeptical,” Basmadjian said.

“There are local voting issues that could have a real impact. But while I’m right that not much will pass and not much will unwind, that shouldn’t really have much of an impact on specific credits or industries.

Priscilla C. Carnegie