I'm still learning about this whole industry and there's something that I'm not quite understanding with this article on bloomberg, http://www.bloomberg.com/apps/news?pid=20601087&sid=aRPJY7CeiAp8&refer=h...
In the second to last paragraph it says this,
" First-quarter U.S. mergers and acquisitions fell 61 percent from a year earlier to $210.7 billion as a jump in credit costs deterred buyers, according to data compiled by Bloomberg. "
It says that M&A activity fell because of the jump in credit costs? I thought that because of the whole credit crunch, interest rates are as low as they've been in a while (discount rate is at 2%) and that the Fed and Bernanke has allowed Ibanks to borrow up to $200 billion against the risk-free T-bonds they get in exchange for AAA mortgage bonds?
If in the 1Q they faced interest rates of 2% and 28 days to repay $200 billion essentially, how has there been a "jump in credit costs"?
Can someone explain to me what I'm leaving out or not factoring in?
.
the banks (that have benefitted from the kindness of Uncle Ben) aren't the ones doing the M&A...
John Mack is right. The
John Mack is right. The ones doing the M&A are the individual companies and the PE shops. As credit quality as a whole declines, borrowers have to pay higher rates so acquisitions that may have been accretive at a lower rate are not anymore. Not to mention covenant-lite loans are a thing of the past. PE M&A is down as shops have to put in closer to 50% equity for some deals and pay more for debt than 2 years ago when you could do a deal with 30% equity and very cheap debt. If you are that levered even mediocre deals can produce above average returns. Everyone has to be pickier about which deals to do these days.
More broadly, despite the
More broadly, despite the Fed lowering interest rates significantly, rates paid by most borrowers in the economy have increased. This is why while the Fed may (or may not) have solved the "credit crises", it is difficult (for me at least) to see how the so called "credit crunch" doesn't result in a (likely severe) recession. And of course, recessions are never good for levels of M&A activity.
In addition, banks are
In addition, banks are currently hedging against a falling Fed Funds rate by putting (or attempting to put) 3% LIBOR floor provisions into all new underwriting and amendments.