Activity across debt and M&A markets slowed in 2022 as rising interest rates and high inflation saw investors, borrowers and lenders recalibrate risk appetite and pull back from new transactions. The contrast to the abundant liquidity and low-cost capital that drove transactions in 2021 was stark.

Investors have responded to this intensifying market uncertainty by resetting risk thresholds and putting capital deployment plans on hold until there is more visibility on where inflation and interest rate rises will top out, and how assets will perform against a volatile backdrop.

White & Case has worked with a range of stakeholders through this turbulent period, including banks, private capital firms, listed companies and sovereigns, advising on regulation, financing deals and M&A transactions. These are some of the themes that drove capital markets activity in 2022.

M&A volumes decline as uncertainty grips

Global private equity (PE) and corporate M&A activity achieved all-time highs in 2021 and proved relatively robust through the first six months of 2022. In the second half of the year, however, activity levels stalled and challenging underlying economics impacted dealmaker confidence.

In 2022, global private equity buyout deal value dropped to its lowest level since the peak of pandemic disruption, with only 6,557 deals worth US$845.93 billion progressing in 2022, almost halving from the US$1.5 trillion of deals posted in 2021. Overall global M&A also saw steep declines, with 2022 deal value falling to US$3.81 trillion from US$5.74 trillion in 2021. 

Nevertheless, activity in pockets of the market remained resilient. After driving M&A in 2021, global technology deal flow sustained steady levels of activity and continued to deliver a stream of megadeals worth more than US$5 billion. Technology, media and telecom deal flow for 2022 was the second-highest annual total on record for the sector since 2006.

Certain regional markets also managed to steer through macro challenges with limited disruption. In the Middle East activity held firm, with 2022 deal numbers the third-best recorded during the last 15 years, as the region attracted strong inbound investment from overseas buyers eager to build exposure to Israel’s technology ecosystem and take advantage of sustainable infrastructure and logistics opportunities in the United Arab Emirates. 

The Japanese deal market also drew increasing interest from overseas investors, with an increase in deals to facilitate succession and shareholder pressure on Japanese companies to divest non-core assets, spurring deal flow. This saw Japanese M&A value total US$72.15 billion in 2022, up from US$65.97 billion in 2021.

Leveraged finance issuance tails off

As was the case for M&A, leveraged loan and high yield bond markets around the world faced a challenging 2022 as macroeconomic headwinds put the brakes on activity levels after a record year in 2021.

US leveraged loan issuance fell from US$1.4 trillion in 2021 to US$1.06 trillion in 2022—a 24.2 percent decline. In Europe, markets proved similarly challenged, with year-on-year loan issuance for 2022 down more than 40 percent at US$193.89 billion. High yield bond activity in the US and Europe also fell year-on-year by 77 percent and 69 percent, respectively, to US$96.50 billion and US$53.91 billion in 2022. 

Soaring inflation obliged central banks in the United States, United Kingdom and Europe to raise interest rates, making debt packages more expensive. As a result, borrowers avoided refinancing unless absolutely necessary, while lenders preferred to buy up existing credits at deep discounts to face value rather than back refinancings, eating into headline issuance numbers.

Western buyout and M&A financing did show some resilience over the first half of 2022 but declining private equity and corporate deal activity in the second half of the year saw PE and corporate-related issuance tail off, too.  

In the Asia-Pacific region (excluding Japan) (APAC), inflationary pressures were less acute, but high yield bond and loan issuance across the region also dropped, with ongoing COVID-19 restrictions in China, the region’s largest market, and dislocation in the key real estate sector weighing down activity.

APAC high yield bond issuance fell 72 percent year-on-year to US$23.44 billion in 2022 from US$86.06 billion in 2021. 

The region’s loan market, however, has proven more resilient with issuance of leveraged and non-leveraged loans only down 16 percent year-on-year. Steady APAC loan activity was underpinned by the region’s cash-rich banks, which remained eager to lend to longstanding, high-quality relationship clients at a time when interest rates were trending higher.

SPAC market contracts after unprecedented growth

Special purpose acquisition companies (SPACs)—investment vehicles that raise money on stock markets to fund acquisitions of private companies—were also buffeted by wider uncertainty. The 2021 boom in SPAC initial public offerings (IPOs) lost steam as bumpy stock markets and a deteriorating economic backdrop eroded investor appetite for new SPAC listings.

In the United States, only 83 SPAC IPOs went ahead in 2022, securing proceeds of US$13 billion, materially below the 612 listings that raised US$156.70 billion in 2021. US de-SPAC deals—where a SPAC merges with a target company—also tailed off, dropping to US$59.86 billion in 2022 from US$368 billion in 2021. 

In Europe, 2022 SPAC IPO volumes dropped to nine from 32 in 2021, with proceeds down 78 percent from 2021 levels. On the European de-SPAC deal side, overall value also dropped 78 percent year-on-year to US$17.72 billion in 2022. 

In addition to having to navigate stiffening global economic headwinds, SPACs also faced the prospect of tougher regulation after some de-SPAC deals fell short of meeting investor expectations. 

In the United States, the SEC put forward proposals regarding potential liability for underwriters involved in de-SPAC transactions. This weighed on the market, with banks pulling backing from underwriting SPAC deals because of fears of increased regulatory intervention. More risk averse investors also opted to redeem SPAC shares at the closing of de-SPAC deals in favor of investing in steadier assets.

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