KPMG: Lending activity to be driven by more M&A

Via a recent survey, KPMG predicts that more mid-market lending activity will increase from a spike in M&A activity in the second half of the year, although political unrest across the world could pose a risk to the credit markets.

KPMG, the US audit, tax and advisory firm, has found that the credit market environment is improving and more companies will be looking to raise capital in the second half of 2014, driven partly by an increase in mergers and acquisitions activity. The firm polled 300 mid-market corporate executives, who also said that political instability across the world could pose a threat to lending.

Of the respondents, 83 percent said they were planning to raise debt capital in the second half of 2014, representing a 5 percent increase from a similar survey in December last year. Forty-four percent of the participants indicated that corporate M&A would serve as the primary driver of credit markets activity in the second of half of the year, increasing from 36 percent previously. Expectations for private equity funded buyouts increased to 31 percent from 26 percent. Twenty-two percent of executives indicated refinancing would also result in credit market activity, increasing from 15 percent over the last six months.

“We’re seeing increased optimism in the economy and, as a result, M&A volume may continue to increase during the remainder of this year.  Buyers are gaining more confidence that rising purchase price multiples make sense, as the economy slowly but steadily improves.  What’s more, since job and wage growth continue to be slow, and without meaningful increases in consumer spending, organizations lack confidence that their organic growth initiatives will result in robust growth rates.  As a result, more acquisitions are being pursued,” Brian Hughes, KPMG’s national private markets group head, said in a news release.

“The US economy is stabilizing and moderately growing, unemployment rates are declining, but there still isn’t meaningful GDP growth,” Ray Kane, managing director in the Capital Advisory Group at KPMG told PDI. Companies that need to grow have been looking at buying businesses in order to achieve that growth, he explained. KPMG has seen more M&A activity lately in areas like TMT, landscape, healthcare and life sciences. “We’re definitely looking for more activity in the financial services and energy space,” Kane said, adding that oil and fracking is expected to be strong as well.

Meanwhile, 26 percent of the respondents said they see geopolitical instability as the biggest risk to the credit markets in the second half of the year. This is up from 10 percent at the time of the last survey. Inflation concerns were cited as the second biggest risk—at 24 percent compared to 16 percent six months earlier. The mid-market executives were less concerned about loosening lending standards, which dropped to 15 percent from 23 percent. Respondents also indicated they were less concerned about the regulatory environment and rising interest rates than they were previously.