Rate Impact on Deals

The most helpful WSO content highlights that the recent spike in rates has significantly impacted deal activity across various sectors. Here's what has been observed:

1. Re-Trading and Deal Adjustments:

   • Many deals tied up a month or two ago are being re-traded or renegotiated due to the rapid increase in rates. For example, borrowers are facing higher costs as lenders adjust terms to reflect the new rate environment. A specific case mentioned involved a borrower losing 30 basis points on $10 million in debt over 10 years because of delays in signing LOIs, with rates jumping from 3.9% to 4.3%.

2. Market Reaction:

   • The reaction has been mixed. Some lenders are honoring previously issued LOIs if signed quickly, while others are pulling term sheets altogether. This creates uncertainty for buyers and sellers, leading to delays or cancellations of deals.
   • In the real estate sector, higher rates are forcing buyers to the sidelines, and appraisal and inspection contingencies are becoming more common again. This trend is expected to continue as rates remain elevated.

3. Sector-Specific Impacts:

   • In equity capital markets, IPOs and follow-ons have been put on hold indefinitely, with deal activity down 30-40% in some sectors. SPACs are also struggling, with a high percentage expected to liquidate.
   • For private capital markets, there’s a stronger bias toward these as public markets face challenges.

4. Strategies in the Current Environment:

   • Opportunistic or necessity-driven deals are still happening, but these often involve less advisor involvement.
   • Down markets are being used as a "pause" to research new markets or neighborhoods and to prepare for future activity when conditions improve.

Overall, the spike in rates has created a challenging environment for deal-making, with many deals being renegotiated or delayed.

Sources: Deal Activity Down 30-40%, Learning curve in development, State of Market Discussion, Return of Tech Earnings? | The Daily Peel | 7/21/22