The first quarter of 2012 was very difficult for lenders because there were very few high quality deals. Now you’re starting to see them enter the pipeline.
In late March and early April we saw a massive amount of merger and acquisition deal flow. That deal flow will likely continue until June through September. Toward the end of the year there’s going to be tremendous opportunity to put money to work.
My prediction is that the fourth quarter of 2012 will be the biggest quarter by far for M&A activity. Tax rates are going up next year, borrowing is still cheap and private equity capital has seen a bit of resurgence in the economy. All these factors create a good environment for a lot of M&A, which means a lot of lending.
Each quarter will likely be successively better during the year, but I don’t think that it’s going to be a straight line. The last time this happened was December of 2010, when the possibility of higher taxes on capital gains and the need for private equity firms to bolster track records in advance of fundraisings led to a spike in deals.
Demand for capital this year will likely exceed supply as most of the world's big banks – which have limited to no appetite to expand bank provided debt capacity – work to reduce their risk-weighted assets to comply with the tighter capital regulations under Basel III.
From a lender perspective, lenders are going to be able to price their own deals. We’re seeing so many deals in the market today that lenders are having to choose which deals they’re even attending and which deals they’re bringing to committee because they just don’t have enough capacity to underwrite them all. There are only so many deals a shop can do at one time.
For chief executive officers and financial managers, however, it is difficult to make risk-based decisions in what we view today as a world of manipulated interest rates. The extent of government monetary policy intervention makes it very difficult to predict where interest rates are heading.
As signs of growth become more prevalent, we continue to believe that interest rates, which the Federal Reserve is keeping artificially low, will eventually turn upward but will remain low for the foreseeable future.
With that in mind, we remain optimistic about the prospects for deal flow through the end of 2012.
Leonard Tannenbaum is chief executive officer of Fifth Street Finance.