Debt capital market activity should remain resilient in the face of an elevated cost of capital. Refinancings likely will remain front and center as issuers chip away at bonds with near-term maturities and wait for M&A markets to rebound. Leveraged loan issuers, of which private equity portfolio companies comprise a significant portion, have $101 billion and $185 billion of loans maturing in 2025 and 2026, respectively.
In the near term, the expectation of limited interest rate increases will likely provide an improved market tone for deals. In early 2024 investment grade bond volume could marginally increase with a focus on refinancing activity, while leveraged finance (high-yield bonds and leveraged loans) issuance may improve due to pent up demand for M&A activity.
Private equity sponsors are likely to adapt to higher-for-longer interest rates and continue utilizing creative financing solutions to complete deals, including private credit. A focus on noncyclical, resilient sectors such as technology, healthcare, industrials and business services will continue from an origination perspective. Substantial dry powder remains for both buyers and lenders alike, but finding common ground on credit, structure, covenants and pricing will be needed to get transactions over the finish line.