Frozen US Funding Market... Liquidity Crisis Pushes Companies Toward M&A (Comprehensive)

Avoidance of Investment in Low-Credit Companies
Rising Borrowing Costs Increase Bankruptcy Risks
Companies with Excessive Leverage Face Difficulties in Refinancing
Increase in M&A Listings... 'The Bill of Gluttony' Arrives

Investment sentiment toward low-credit companies in the United States is freezing up, causing their borrowing costs to soar. As macroeconomic conditions worsen due to the Federal Reserve's (Fed) interest rate hikes and economic slowdown, borrowing rates are rising, leading to expectations of an increase in sell-offs in the mergers and acquisitions (M&A) market.

According to major foreign media on the 20th (local time), U.S. low-credit companies are facing difficulties in raising funds as the $1.4 trillion (approximately 1,800 trillion KRW) 'junk loan' market contracts.

In particular, the market for collateralized loan obligations (CLOs), which bundle bank loan claims of low-credit companies and reissue them as collateral, is rapidly shrinking. According to market research firm PitchBook LCD, the volume of new CLO issuances from the beginning of this year until June 12 was in the $50 billion range, down from around $60 billion a year ago. Compared to 2021, when CLO issuances surged to about $70 billion, the decline is even more significant.

Not only new CLO investments but also reinvestments are decreasing. According to Bank of America (BofA), the proportion of CLOs reaching the end of their reinvestment period by year-end is expected to rise from 20% at the end of last year to 40% by the end of this year. This indicates that it is becoming increasingly difficult for low-credit companies to raise funds.

The Fed's aggressive tightening and economic slowdown have led to a tightening of corporate funding markets. Concerns over junk loan defaults are gradually becoming a reality. According to Goldman Sachs, there have been 18 defaults totaling $21 billion (approximately 27 trillion KRW) in the $1.4 trillion U.S. junk loan market this year alone. This amount exceeds the total amount of bad loans that occurred over the past two years (2021?2022). The junk loan default rate also surged from 4% in April last year to 6% in April this year.

Rob Jaible, Global Head of Liquidity Credit Strategy at Blackstone, said, "Companies need to attract the interest of new lenders, so capital raising costs may also be affected." BofA strategist Pratik Gupta explained, "Traditionally, large banks, which are major investors in CLOs, began withdrawing from this market after stress tests last year," adding, "Banks have become more conservative in their investment portfolios."

Due to the rapid interest rate hikes that began last year, companies are being pushed to the brink of bankruptcy, leading to a significant increase in sell-offs in the M&A market. Companies that expanded their businesses through excessive leverage during the ultra-low interest rate era over the past decade are now facing soaring borrowing costs, resulting in what is called the 'bill for binge eating.'

According to Bloomberg, among the corporate bonds issued with heavy leverage during the liquidity-rich COVID-19 pandemic, junk bonds (non-investment grade corporate bonds) maturing in 2026 are estimated to total about $70 billion (approximately 90 trillion KRW). These junk bonds face refinancing difficulties due to credit tightening, and refinancing costs have increased more than fourfold compared to 2021.

Recently, the French major retailer Casino Group has begun restructuring by selling stakes in two subsidiaries: GreenYellow, a renewable energy business, and Asia, a Brazilian supermarket chain. Swedish real estate company SBB, recently downgraded to junk status, is also planning asset sales due to deteriorating financial health.

Thierry Bosley, Global Co-Head of Private Equity at law firm White & Case, said, "With banks adopting a more conservative lending stance, funding conditions (such as maturity extensions and repayment deferrals) have become more difficult than during the pandemic."

This content was produced with the assistance of AI translation services.