The M&A market amidst the pandemic

    Covid-19 has resulted in a dramatic slowdown in US M&A (mergers and acquisitions) activity as the pandemic unleashed unprecedented financial market volatility and liquidity squeezes. Rather than seeking out acquisition opportunities, a number of companies are instead fighting for their own survival or leveraging lines of credit with their lender banks. Data from international law firm White & Case indicates that US M&A volumes were down 25 per cent in Q1 2020 versus Q1 2019, while the overall value of transactions fell sharply by 39 per cent to USD563.70 billion as megadeal valuations collapsed.1

    Dealmaking has remained subdued as the Covid-19 crisis continues, with Refinitiv reporting that the number of acquisitions in the US since April 2020 has declined by 90 per cent year-on-year to USD75 billion.2 Although M&A activity is undergoing a steep contraction, industry experts are optimistic dealmaking will quickly recover post-pandemic. Many investment bankers will have been encouraged by recent transactions such as Just Eat Takeaway’s acquisition of GrubHub in the US, and Uber’s USD2.65 billion buyout of food delivery start-up Postmates. Christopher Samms, Sector Head, Specialised Industries, Global Banking at HSBC, points out that companies are increasingly looking to fuel further growth by capitalising on some of the low valuations and making acquisitions.

    “We are seeing a number of sovereign wealth funds and pension funds take a greater interest in acquiring significant stakes in target companies, mainly because interest rates and yields are so low. We have also observed a growing trend of Chinese companies buying US businesses, although this has been impacted by recent geopolitical tensions. Additionally, private equity firms are proactively looking for opportunities to help companies that have been impacted more than others by the pandemic with investments at various levels of the capital structure” he says. Nonetheless, Covid-19 has led to a shift as more companies turn to different funding sources to execute acquisitions, continues Samms. Companies are now looking beyond banks for financing and are leveraging capital markets instead, as they look to take advantage of the low rates, Samms adds.

    We are seeing a number of sovereign wealth funds and pension funds take a greater interest in acquiring significant stakes in target companies, mainly because interest rates and yields are so low.

    Christopher Samms

    Adapting Escrow services to adjust to Covid-19

    An escrow agreement is a structure which supports clients in a number of different ways including M&A transactions. As Covid-19 continues to reshape markets and industries, escrow solutions, however, are proving to be a flexible and strategic tool in this new environment.

    Jamie Pratt, Head of Issuer Services Americas at HSBC, reports there has been a significant increase in interest for escrows since Covid-19 first struck. “A number of companies are entering into new trading partnerships, escrows are used to mitigate counterparty risks associated with the transaction. Escrows are also being used more extensively on trade finance transactions, as firms move away from letters of credit citing risk concerns,” he explains. In addition, Pratt adds his teams have been consulted a number of times by clients enquiring about the use escrows for transactions involving the procurement of Covid-19-related medical equipment such as Personal Protective Equipment (PPE).

    Operationally, escrow solutions have proven very resilient during the pandemic. “As an offering, escrows are fairly straightforward to implement. We hold cash and release it once certain pre-agreed conditions are met,” comments Pratt. Moreover, HSBC has invested heavily into its core technology, and is rapidly digitalising its entire Issuer Services business through the adoption of APIs (application programming interfaces); core analytics, big data management; database capabilities; and waterfall technologies.

    Did you know?
    • An Escrow is an arrangement whereby an independent entity is entrusted with assets (normally cash) for safekeeping purposes on behalf of two separate counterparties during a transaction, which requires a guarantee of payment completion.
    • Escrows can be used to support a trade finance transaction, being a convenient and secure cash solution to facilitate domestic or cross-border transactions
    • Additional services often combined with escrow accounts include: account bank, pledged account bank (standard account opened up with HSBC, with a pledge acknowledged) and pledged custody. Find out more about #HSBCescrow or watch the video.

    Case study 1: Infrastructure Development Solutions

    HSBC acted as intraday lender, escrow agent and loan servicer to enable a large Bank Client to acquire a key stake in a multi-billion dollar infrastructure development project. As part of the services, HSBC provided a solution tailored enabling the client to purchase an additional stake in its target. The solution required HSBC to provide an intraday loan for the full amount of the acquisition while Issuer Services provided an escrow and agency solution.

    HSBC executed the transaction in a timely manner with the receipt and disbursement of funds taking place within three hours. This solution is now available to other clients in the market segment to satisfy their deal closing requirements in USD or any other major currencies.

    In a way, the crisis has allowed us to develop a very different relationship with clients, through digital channels while looking at new solutions to provide to them, sometimes quite different than those we would have considered in normal times.

    Jamie Pratt

    Supporting insurance linked securities

    In addition to supporting M&A transactions, escrow solutions are being widely deployed in the insurance linked securities (ILS) market. ILSs are financial instruments that allow insurers and reinsurers to offload risk onto the capital markets. These comprise normally of products such as catastrophe bonds (cat bonds) and they enable institutional investors to capture a premium uncorrelated to equities and bond price movements, although losses are incurred when disasters strike. While the ILS market shrunk by 0.55 per cent year-on-year in 2019 to USD30.12 billion, this is mainly attributable to the large volume of maturing structures and existing structures which have held collateral. 3

    Ronald DeSorbo, Business Development Manager at HSBC Issuer Services in the US, highlights the bank has supported clients on a number of complex ILS transactions by acting as insurance trustee, escrow agent and collateral agent. “Nearly all of the ILS transactions we work on are linked to natural disasters,” he adds.

    HSBC’s insurance trust/escrow solution can support clients participating in the ILS market through a number of different ways. For instance, it can help institutions with their risk management, as escrows have proven effective in mitigating timing and counterparty risks during the transaction lifecycle.

    Case study 2: A Bermudian reinsurance company
    HSBC served as trustee for a client acting as grantor and numerous beneficiaries. HSBC provided a streamlined approach to engaging as trustee on these ILS transactions, supporting the client with standardised documentation; streamlined KYC; dedicated client service and transaction management. Leveraging its presence in Bermuda, HSBC is well-placed to support the increasing demand for collateral solutions through the provision of insurance trust services catering to the captive insurance, insurance and ILS market.

    We have supported clients on a number of complex ILS transactions by acting as insurance trustee, escrow agent and collateral agent. Nearly all of the ILS transactions we work on are linked to natural disasters.

    Ronald DeSorbo

    Partnering with clients during the crisis

    Covid-19 has ushered in a period of unprecedented volatility – even during the peak of the financial crisis – which means it is essential that clients work with well-capitalised and excellently risk managed financial counterparties. Pratt says HSBC’s global footprint and deep rooted local market expertise have helped the bank to deliver a highly bespoke escrow service to underlying clients, leveraging the strength of the Group’s balance sheet and strong credit rating. “Our service is driven by the needs of our clients. In a way, it has allowed us to develop a very different relationship with clients, through digital channels such as Zoom and looking at very different solutions to provide to them, that we would have in normal times. In this sense, it has been testament to our business resilience and commitment to our clients,” comments Pratt.

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    To find out more about HSBC Issuer Services:

     

    1 White & Case (April 17, 2020) Most pending US M&A deals are proceeding as agreed, despite Covid-19
    2 Financial Times (July 1, 2020) Global dealmaking drops to lowest level in over a decade
    3 Swiss Re (March 13, 2020) ILS market update: March 2020

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