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On Rising Interest Rates: ‘Drivers of Deals are Still Present’

March 17, 2022 Claire Poole

The Texas Lawbook asked a half dozen lawyers how the Fed’s move to raise interest rates Wednesday will impact M&A and the capital markets in Texas. Here are their responses: 

Alain Dermarkar, partner at Shearman & Sterling in Dallas:

“From my perspective, while this will obviously have an impact on the market generally, particularly I think consumer goods, I don’t think its impact is as significant as gas prices on the overall economy.  In terms of M&A activity, I think this has been priced in for a while and I don’t think it will have a significant impact on overall activity, given that we continue to see a lot of capital looking to be deployed.”

Sandy Brown, partner at Alston & Bird in Dallas: “The rising rate environment has been, for the most part, already baked into the market.  The question was how many increases and over what period of time; we now expect that to be six raises of 25 basis points each over the next nine months (or so).  Most banks are asset sensitive, so the increase in rates should improve net interest margin and (for awhile at least) earnings.  I still expect a fairly robust bank M&A market in 2022, but it isn’t likely to be as active as 2021 was.  The drivers of deals — that is, the need for scale on the buy-side and the need for liquidity and/or succession on the sell side — are still present. The uncertainties around inflation and Russia’s invasion of Ukraine are likely to keep the M&A market on the quiet side for a little while, and inflation is going to be a concern even after the mess with Russia is over, because it was a concern before Russia invaded Ukraine — the Fed’s attempts to rein in inflation aren’t going to work overnight.”

Carina Antweil, a partner at Baker Botts in Houston:

“The increase in interest rates will make financings more expensive, but many of our buyers enjoy strong balance sheets and don’t need to borrow money to execute a deal. Last year we also saw issuers access the capital markets to take advantage of historically low rates.  I do think that companies with funding needs will accelerate those plans now in light of the Fed signaling that there are six more rate increases coming this year.  And although volatile, energy stocks are outperforming in 2022, so this may be an even busier year for capital markets transactions in Texas than we were initially anticipating.”

Whit Roberts, partner at O’Melveny in Dallas: “Interest rates remain at historically low levels.  However, the prospect of higher interest rates could prompt sellers to consider an M&A opportunity in the near term even though they may have been waiting for other reasons.  It also could prompt buyers to work to accelerate the pace of closing M&A transactions.  A buyer could make a pre-emptive bid in an auction process (or before an auction even begins) — not only to win the deal but also to shorten the process to close the deal.”

Wilson Chu, partner at McDermott in Dallas:

“In the near term, [we should see] increased deal activity as fence sitters feel urge to get deals done before the next shoe drops.”

Robert Rabalais, partner at Simpson Thacher in Houston: “I don’t have much insight really than basic macroeconomics — rising rates means borrowing costs rise and make M&A transactions more expensive to execute especially when reliant on debt financing.  On the CapM side, new issues will need to be richer, relatively, in order to clear. Opportunistic refinancings may be less prevalent.”

Claire Poole

Claire Poole is a senior writer at The Texas Lawbook, where she covers corporate transactions.

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