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Intrepid M&A explorers will find rewards in the COVID-crisis tundra

Uncertainty and volatility will weigh heavily on market sentiment. Dealmakers are cautious and readying themselves for a difficult and challenging period ahead.

The last six months have been the most challenging for European dealmakers since the 2008financial crisis. The COVID-19 pandemic and ensuing lockdowns have taken a heavy toll on the continent’s economies and sent M&A activity tumbling. 

The European Commission is forecasting an 8.3% contraction in EU GDP for 2020. Year-on-year, H1 M&A activity in Europe was down 31% by volume and 29% by value. However, there are some reasons for optimism. European economic growth is expected to rebound in 2021 and, at least for now, loosening lockdowns have allowed vendors, investors and advisers to meet and advance deals.

But the speed and sustainability of economic recovery will depend in great part on the development of a vaccine. Until one is distributed, uncertainty and volatility will weigh heavily on market sentiment. It is unsurprising, then, that respondents to this year’s survey are cautious and readying themselves for a difficult and challenging period ahead.

Key findings from our research include:

  • M&A appetite weakens: 74% of respondents say the pandemic has caused their deal making appetite to lessen. 65% of respondents are not considering M&A, against 45% in last year’s survey. Uncertainty around future company earnings has widened pricing expectations between vendors and buyers. Dealmakers are nervous about paying full multiples for assets at a time of high volatility, while vendors are reluctant to crystallise lower valuations at the bottom of the cycle.
  • Financing conditions to tighten79% of respondents expect financing conditions to become more trying in the coming year. Leveraged loan issuance is down year-on-year and, although corporates have been able to tap high-yield bond markets, lenders are focused on nursing current portfolios through COVID-19 disruption rather than funding new transactions. Debt for deals is expected to be more expensive and issued on tighter terms than were available pre-pandemic. Distressed M&A, restructuring and corporate defaults to rise.
  • All respondents anticipate an increase in distressed M&A, 90% say there will bean increase in restructuring activity, and 82% expect an increase in corporate defaults. The pandemic has already forced companies in sectors impacted directly by lockdowns– such as aviation, retail and leisure – into insolvency and restructuring. As government support mechanisms unwind, more businesses will encounter distress.

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