Deals face further financing uncertainty after Credit Suisse rescue

Ryan Gould , Charlie Taylor-Kroll , Dominic Pasteiner and Patrick Costello
21 March 2023

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Corporates and private equity firms are expected to feel the тslow bleedт of uncertainty on global financing markets as banks and investors begin to reckon with the fallout from UBS Groupтs rescue of domestic rival Credit Suisse.

While the government-brokered deal for a long-time icon of European corporate finance is expected to further hamper investor confidence and delay a resumption of more stabilized M&A conditions, dealmakers point out that it is unlikely to have a sustained impact on small to mid-cap deals, with large leveraged transactions already stunted prior to the collapse of Credit Suisse.

The deal to rescue Credit Suisse comes less than two weeks after the collapse of US-based lender Silicon Valley Bank (SVB). The Federal Deposit Insurance Corporation (FDIC) took control of venture capital-friendly SVB on 10 March following a bank run and its subsequent failure to raise capital to shore up its balance sheet.

"This is all pretty bad for financing and the general sentiment. It's a confidence game, and volatility hampers dealmaking," said one UK-based banker. "This is going to be a slow bleed, rather than a snap reaction, and the impact will be where clients move money from mid-to-small banks to better and stronger banks."

The combination of UBS and Credit Suisse – the first merger of two systemically important banks since 2008 – has come at a precarious time for global dealmaking. M&A values globally are down 48% year-to-date to USD 467.9bn versus the same period last year, while, in Europe, value has cratered 71% to USD 65.5bn, according to Dealogic. Fee opportunities have subsequently been limited: global fees for buy and sell side M&A roles totalled USD 8bn in 4Q22, the lowest for a quarter since 3Q20.

Prospective buyers, sellers and their advisers should expect more days like those seen in the past two weeks following the collapse of SVB, as market participants recalibrate risk appetite, according to another senior banker.

"Things went to a halt over the last 10 days. During this period there were serious concerns that this was quickly turning into another global financial crisis-type scenario, so no one was seeking financing during that period," he said. "The feeling as of today is that is a bit of a blip."

There could be another period of "wait and see" before transactions start to happen again, said another M&A practitioner. "No one wants to be the first to jump in these situations."

UBS chairman Colm Kelleher has already vowed to shrink Credit Suisse's "tricky" investment banking division, aiming to align it with the Swiss bank's "conservative risk culture".

For those deals that have already been announced, that ‘blip' may matter less. One banker said while there was an expectation that investors would move further towards being ‘risk off', the early-stage feeling is that further advanced deals where financing has already been committed should be less affected by short-term market jitters of contagion across the banking sector.

"Psychologically, it is a problem, a big blow-up, but everyone saw this coming over the last few days. I don't think this will have a sustainable effect on what we're doing," said a Frankfurt-based M&A adviser, who focuses mostly on small to mid-cap deals. "Really, it's a mental barrier you need to overcome – you need trust in the system again."

Leveraged finance was "already hard" prior to Credit Suisse's fall, a banker working on TMT deals said, noting that "no bank has been removed from the market that would do a mid-market deal."

With trust in tow, deals in the mid-cap market and from investment grade issuers should stand to fare best in the coming months, bankers suggest. With a spike in leveraged loan and high-yield bond yields among the most cited reasons for a downturn in M&A at the end of 2022, new big-ticket transactions that require large debt components are likely to remain stunted.

"There shouldn't be too much of a change [to the absence of large leveraged buyout deals]," one of them said. Where they do occur, and where financing is required to be put in place, "there are plenty of providers who remain willing to distribute those commitments" to robust borrowers, he added.