In this special series on the outlook for leveraged lending for the year, we’ve looked at what our readers can expect for deal terms, including pricing, leverage, structures, and covenants. We’ve also closely examined the factors that will affect the supply and demand for transactions. Last week, we covered the future of credit quality.
Finally, let’s turn to what outside-the-box, exogenous factors could upset the credit applecart this year. A recent Preqin survey (see Chart of the Week) highlights some of these issues. Here’s our take:
Interest rates – Despite its forecast of three rate upticks for 2017, there’s no guarantee the Fed will actually do so. Chair Yellen has proven to be a reluctant hiker. The futures market seems to be skeptical about a move in March, though recent news on productivity and job growth will create pressure to act sooner rather than later.
Libor has risen steadily over the past six months, with the three-month benchmark now over 1%. Over the longer term, this will make Libor floors, many set at 1%, moot. Of course, if rates rise faster than markets expect, that would boost interest expenses for leveraged borrowers. Having said that, it would take quite a jump to match where Libor was before the credit crisis. In September 2007 three-month Libor was 5.6%. We’ve got a ways to go.
Geopolitical risk – With uncertainty surrounding immigration and NATO, as well as relations with Russia, China, and key allies in flux, the US is more exposed to unanticipated global events. That has introduced a greater measure of volatility into broader markets. A more acute North Korean military provocation, for example, could puncture the recent rally in equities, causing a ripple effect in asset valuations.