The outlook for interest rates has changed markedly since the
beginning of the year in the face of rising inflation across the globe, with central
banks in many leading economies having increased rates on successive occasions.
In recent weeks, market expectations have remained volatile. At
time of writing, Refinitiv data suggests the market is expecting the Bank of
England will raise interest rates to 4.6%, the US Federal Reserve to 5.0% and
the ECB to 2.8% during 2023. Considering rates were at 0.25%, or lower, across
all three economies only a year ago, this higher rate environment will impact
the M&A landscape.
The effects are three-fold.
Rising interest costs will continue to impact near-term valuation expectations, volumes and debt markets for specific sectors .
The rise in discount rates means there will be a return to focus on bottom-line profitability as well as top-line growth.
Increasing interest rates are also likely to result in greater funding cost and leverage disparity within a financial sector that had grown accustomed to lower-for-longer interest rates. This should mean a greater focus on relative balance sheet strength and potential financing structures in an M&A context, which may change the buyer universe and appetite for a particular asset.