Bank lending, which plummeted after the credit crunch, remains constrained and leveraged buyout deals are still difficult to arrange.
But bankers say some recent commitments, such as Warner Chilcott's
For the first time since the credit crisis, financing is available at the lower part of the credit spectrum -- that's the good news, said Steven Smith, global head of leveraged finance and restructuring at UBS
The bad news is that it is still expensive.
The credit crisis that started in the summer of 2007 shut off the ability of banks to lend money for deals.
Credit markets froze and M&A volumes plunged.
Notably absent were private equity firms, which had extensive funds to put to work but weren't able to get large financing packages for leveraged buyouts.
A revival of the market for leveraged loans -- made to junk borrowers and thus carrying higher risk -- is vital for private equity firms to be able to ink large deals again. Private equity executives say that LBO financing is still hard to come by.
Global issuance of syndicated loans totaled $1.16 trillion in the first nine months of 2009, according to data from Thomson Reuters, marking the slowest first nine months of the year since 2000. But optimism is returning, bankers say.
The sentiment in the leveraged loan market is at the highest point since the market disruption of last summer, driven by strong equity and bond market performance, said Stefan Selig, executive vice chairman of global corporate and investment banking at Bank of America
Conditions in the leverage loan market are ripe for new issuance, he said.
Warner Chilcott is launching for general syndication next week the financing that will back its acquisition of the P&G unit, sources have told Reuters Loan Pricing Corporation (RLPC). The deal is expected to see a quick syndication.
Bankers are also closely watching the $1.9 billion acquisition of a majority stake in eBay Inc's
That deal is backed by $600 million of bank financing, according to RLPC.
William Hughes, Head of U.S. Leveraged Loan Syndicate at Barclays Capital, said confidence among underwriters to commit to financing acquisitions, LBOs and corporate refinancings was returning.
We're clearly at the front end of that process and starting to see more and more (LBO) transactions in early stages that ultimately the market will see in weeks or months ahead, he said.
Bid levels on the most liquid leveraged loans and high-yield bonds have climbed by 25 basis points this year.
One third of liquid leverage loans saw price gains greater than 35 points, showing growing stability in the leveraged loan market, according to data from RLPC.
At the same time, borrowers have tapped the high-yield bond market to repay leveraged loans.
The repayment of nearly $40 billion in leveraged loans has put cash back in the hands of loan investors.
The question is whether the situation is sustainable.
Does the Street flood the market with financings and sap the available liquidity? said Hughes.
I don't think it is going to happen... There's been a pickup in (deal) activity levels but not enough to oversupply a market that's been on a starvation diet.
Bank bailouts, injections of government cash and lower interest rates have spurred a revival in both equity and credit markets this year. Companies have tapped the bond market, flush with institutional and retail cash, for deal financing.
Earlier this year, mammoth bond sales funded several pharmaceutical deals. Pfizer Inc
Financing packages for deals are clearly weighted as much as they can to the bond market said Smith at UBS. The bond market has been a very receptive place to put debt.
Kraft Foods Inc
Investment grade spreads -- the risk premium of owning U.S. investment-grade bonds over government bonds -- are now down to 230 basis points, the tightest since before Bear Stearns collapsed in March 2008.
Tighter spreads mean lower borrowing costs and indicate a greater availability of money. They show that investors are demanding more debt, meaning they must accept lower returns.
Many companies have come through the crisis in a strong position financially, said Francis Aquila, partner at law firm Sullivan & Cromwell, who sees a pent-up demand for deals.
They now have a pile of cash and the ability to borrow more, he said.
Bankers expect the deal pipeline to continue to grow.
Absent any big surprises we will continue to see the deal pipeline build -- all forms of deal activity, I think, will pick up, said Smith at UBS.
(Additional reporting by Faris Khan and Tessa Walsh at RLPC in New York, Jessica Hall in Philadelphia, Daniel Burns in New York and Jane Merriman in London; Editing by Ted Kerr)