We have seen a fair amount of handwringing in 2011 about the slowdown in lending deal flow since the first of the year, both by Ron Kahn of Lincoln International here at peHUB and also by Randy Schwimmer of Churchill Financial. My colleague Bernard Vaughan has also written about the same issue at sister site Buyoutsnews.com. (Subscribers can see that report here.)
The concern is that, apart from refinancings and recapitalizations, which have been booming, the volume of fresh deal flow in the leveraged lending market has been disappointing so far in 2011, forcing lenders to take on lower quality deals, offering disadvantageous loan terms and potentially damaging investor returns down the road if debtors get into trouble.
The counterargument is that so much volume was pushed into the fourth quarter of 2010, when everybody was afraid that tax rates would go up as the Bush tax cuts expired (they didn’t, as we know now) that it simply pulled activity out of this quarter, and it will take time for dealmakers to recharge their batteries.
But here’s the thing: Q1 is almost always slow. This pattern goes back at least a decade. I’ve been looking at some data from Thomson Reuters LPC, a sister information service that tracks leveraged lending, which put a report out late last month.
Admittedly, it’s been a wack decade, including both a manic boom and an historic financial collapse. Still, since 2002, Q1 has been slower than any other quarter of a given year, with only three exceptions, as this chart from LPC shows. Strangely enough, the first quarter of 2003 was busier than the second. I have no macro-economic explanation for that; this was a year after the end, in November 2001, of the recession that followed the dot-com bubble’s collapse. In 2007, as an overheated deal market began to cool ahead the recession that began December of that year, the first half was considerably stronger than the second. And Q1’08 was, ironically, the strongest quarter of that year, as the recession deepened leading up to Lehman Brothers’s collapse that September.
Even in deal-starved 2009, the first quarter was the worst.
Of course, past performance is no guarantee of future results. But it’s still the way to bet. And investment bankers say they are working diligently to fill up the pipeline for leveraged lenders later this year. I’m inclined to think that is likely to happen.