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Real-Time Capital Markets Perspectives

  • U.S. workers filed 2.1 million jobless claims last week, representing the eighth consecutive week of declines following the high water mark of 6.9 million in the week of March 28th
    • Claims have remained above 2 million since mid-March, indicating that employers have implemented further layoffs while many workers also continue to navigate through overwhelmed state unemployment compensation systems
      • Economists continue to reiterate that elevated claims do not necessarily translate to growth in unemployment as losses are offset by many workers being asked to return to prior employers or have found new jobs
  • The Commerce Department announced that U.S. GDP declined 5.0% in the first quarter, a revised figure representing the third worst level recorded of all time and the largest decline since the last recession
    • Economists expect a more significant contraction in the second quarter when lockdowns took greater hold in early April
  • Despite these more sobering figures, the economy continues to turn the corner as states reopen economies around the U.S.
    • Recently, a major bank executive indicated that customers typically with checking account balances of $5,000 and below on average before the crisis have increased their balances by 30-40% today, providing greater confidence that stimulus measures are starting to take hold and more consumer spending will be on the horizon

Mergers & Acquisitions Markets

  • While the market for broad-auction sell-sides remains subdued, select M&A deals are transacting
    • Increased propensity for ‘high-touch’ M&A, as parties utilize this period of dislocation to engage in bi-lateral discussions / approaches around strategic acquisitions and combinations
  • Pitch activity has started increasing (albeit telephonic / video based), as clients evaluating an exit prior to COVID-19 consider adopting a ‘prepare an wait’ approach to maximize optionality and the ability to quickly pivot to evolving market conditions
  • Debt market volatility remains a constraint, with financing support for M&A transactions varying largely on the size of the facility (and the number of lenders involved), the quality of the issuer (and of the underlying deal) and end market
    • Many are utilizing lower leverage / outsized equity checks (lower quantum of debt needed), allowing for subsequent refinancing flexibility
  • As M&A activity begins to rebound, expect significant focus and attention on “COVID-19 EBITDA Adjustments”
    • Anticipate a variety of methodologies (run-rating, budget vs. actual, etc.) will be employed to define Adjusted EBITDA excluding the impacts of COVID-19; buyer and financing receptivity will likely vary depending on company and industry-specific factors
    • In purchase agreement negotiations, we anticipate detailed discovery related to government funding and its potential obligations, as well as several changes in tax and accounting policies (interest deductions, AMT credits, etc.)
  • In recent weeks, select deals signed pre-COVID-19 have entered litigation, with buyers claiming material adverse effect (MAE) and covenant breaches to avoid closing
    • Expect heightened focus on closing conditions and ‘outs’ for any deal signed during this time that is not a simultaneous sign/close

Debt Capital Markets

  • The high grade and high yield bond markets took another leap forward this week, on the heals of last week’s continued strength
    • Investment grade bond issuance surpassed $1 trillion for the year, representing the fastest pace to ever reach these levels
    • The high yield market index has rallied 100bps since mid-April, driven by mutual fund inflows (tracking at $6.25 billion this week – 3rd largest week ever), totaling over $50 billion over the last two months
      • New issuance totaled $11 billion this week, with (i) better quality companies executing on re-financings to capture better pricing, (ii) liquidity continuing to be a primary focus, and (iii) acquisition financings being more prevalent (e.g., take-out financing on WESCO’s acquisition of Anixter)
  • The leveraged loan broad market continues to see improvement, whereas the middle market remains largely closed
    • In the secondary market, the LSTA 100 Index continues to move in the positive direction, reaching just under 92 on Thursday

Equity Capital Markets

  • Despite the shortened week, all three major indices closed in the green over the first two trading days, fueled by optimism that economic activity is gaining steam, followed by a contraction on Thursday
    • A passing of the baton occurred in which economically sensitive cyclical stocks (e.g., financials, industrials) rebounded this week, erasing some of the debilitating losses suffered since mid-March
  • Last week was the second most active for ECM issuance this year, with 41 deals priced that raised $18.5 billion in capital
    • Equity issuance has been light on this holiday shortened week with six transactions pricing to raise $7.6 billion in capital

Sources: WSJ, U.S. Commerce Department, ISM, Bloomberg, LCD, KeyBanc Capital Markets

KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp® and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A. This report was not issued by our research department. The information contained in this report has been obtained from sources deemed to be reliable but is not represented to be complete and it should not be relied upon as such. This report does not purport to be a complete analysis of any security, issuer, or industry and is not an offer or a solicitation of an offer to buy or sell any securities. This report is prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual person or entity