M&A dealmakers, lenders and debt investors had a challenging year.

Global M&A fell 16 percent year-on-year in 2023, as an uncertain economic outlook and geopolitical concerns put the brakes on prospective deal flow.

Debt markets also came under pressure. Rising interest rates throughout the year pushed up borrowing costs and constrained the availability of liquidity. This saw leveraged loan issuance in the US and Europe suffer double-digit year-on-year declines in 2023, while APAC loan markets saw issuance dip by nearly a fifth.

Against this backdrop, White & Case worked closely with lenders, private capital dealmakers, companies and sovereigns to navigate the deepest slowdown in transaction activity and lending since the 2008 global financial crisis.

These are some of the key themes that reshaped M&A and debt markets throughout the recent downturn.

Market headwinds reshape M&A dynamics

The macroeconomic headwinds that hit dealmaking in 2023 reconfigured the M&A market and changed the strategic rationales for doing deals.

Private equity dealmaking was directly impacted by rising rates, which pushed up debt costs and constrained access to the leverage and inexpensive debt that helped to finance buyouts and enhance returns at the peak of the market in 2021.

On the corporate side, meanwhile, barring a few exceptions (such as the mining sector), the majority of M&A shifted from expansive, big-ticket deals targeting growth to transactions informed by a refocusing on core operations, strengthening balance sheets and adapting to long-term secular shifts in certain sectors.

Carve-out deals, where businesses divest assets deemed to be non-core, progressed as companies trimmed portfolios to focus on their most profitable divisions or raise cash and reduce debt as expensive refinancings came into view.

Businesses, however, not only turned to M&A when playing defense. They also pursued deals that addressed key long-term strategic objectives that extend way beyond the current interest rate cycle.

The oil & gas sector is a case in point, with companies using M&A to diversify away from carbon-intensive assets into renewables and green energy. The last year saw oil companies invest in an array of wind, green hydrogen, hydroelectricity, carbon capture and electric vehicle deals, as the industry moved to decarbonize.

Winners and losers

Although the slowdown in M&A markets was challenging across the board, some stakeholders emerged from market dislocation in a strong position and saw opportunities to do deals.

Sovereign wealth funds (SWFs), for example, continued to rely on M&A as a tool to lock in growth, diversify economies and build influence on the international stage. With deep pockets and longer-term investment horizons, SWFs did not have to cut back on deployment and participated in more than 100 deals worth more than US$50 billion in 2023.

Other pockets of the M&A market also proved resilient. For example, major food sector companies did not shy away from big-ticket investments to diversify portfolios, consolidate categories and respond to shifting consumer preferences; while emerging, fast-growing sectors, such as generative AI, enjoyed a boom in M&A investment.

While deal markets were challenging, fund buyers were willing to pay good prices for high-quality assets with long-term strategic value.

Leverage in limbo

As in M&A, leveraged finance markets were significantly quieter throughout 2023. Issuance in Western markets contracted in the face of higher interest rates, while a liquidity crunch in the key Chinese real estate sector saw debt issuance in the Asia-Pacific region (APAC) decline.

The failure of Silicon Valley Bank and the sale of California-based First Republic to JPMorgan Chase in a deal pulled together by regulators also dampened lender and investor appetite. Banking system distress was also seen in Europe.

Amid this turbulence, borrowers had to be nimble and explore all avenues for sourcing liquidity and protecting balance sheets.

Private equity sponsors drilled down into loan documents to ensure that rising interest rate costs did not erode headroom or compromise financial covenant compliance.

All borrowers tried to maximize the financing options available to them. In the US, for example, issuance of US convertible bonds, which can be converted into shares at pre-agreed price thresholds, surged as pools of mainstream liquidity contracted. Borrowers with large revenue from exports, meanwhile, found term loan C debt—which is used to fund cash collateral accounts that support the essential letters of credit that exporters rely on—to be an especially attractive option at a time when credit markets have been volatile.

Despite tough market conditions, lenders have been pragmatic and offered companies support where possible. Private credit players, who have become increasingly influential in private equity deal financings, have been open to supporting companies and sponsors by extending maturities and amending terms to help borrowers through periods of market disruption.

In a challenging year, lenders and borrowers showed their willingness to be patient, do their best to preserve value and be ready to rebound when market conditions improve.

Photo by © Afonkiin Yuriy / GettyImages
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