Bankers bet big on 2026 after underwriting US$65 bil in deals

(Dec 3): Leveraged finance bankers have long anticipated the return of M&A. Now they’re betting that next year they might finally be right.

Banks have underwritten around US$65 billion of debt tied to leveraged buyouts (LBOs) for 2026, according to Bloomberg calculations, fuelling hopes for one of the strongest years so far this decade. Dealmakers are banking on markets remaining calm enough to sell on those commitments to investors.

Get it right, and they’ll pocket some of the most lucrative fees in investment banking. Get it wrong, and they risk a repeat of 2022’s painful losses.

“We expect an increase in LBO financings to drive the BSL market in 2026,” said Alex Robb, a finance partner at law firm Ropes & Gray, referring to the broadly syndicated loan market. “The success of this pipeline hinges on the market’s resilience. Any volatility could challenge syndication efforts and pricing.”

Among the most highly-anticipated of the mega-deals lined up for next year is the US$20 billion financing backing the acquisition of video game maker Electronic Arts Inc (EA), the largest buyout debt commitment on record. Banks on that EA take-private — set to hit the market in the first half of 2026 — are in line to collect US$500 million or so in fees on that one transaction alone.

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Other substantial cross-border debt packages expected to launch on both sides of the Atlantic early in the new year include the US$7.9 billion financing for Clayton, Dubilier & Rice’s acquisition of Sealed Air, the packaging company best known for creating Bubble Wrap, and the US$3.1 billion debt backing Lone Star Funds’ take-private of equipment company Hillenbrand Inc.

But while credit markets are definitely open for business, a degree of investor skittishness risks dampening bankers’ optimism.

Lean years

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M&A activity stalled in 2022 after Russia’s invasion of Ukraine, a surge in inflation and a sharp rise in interest rates. Bankers have repeatedly seized on early signs of a rebound, only to be disappointed, leaving them focused on refinancings and repricings — the low-glamour, low-pay grunt work of the industry.

Wall Street has also been more risk-adverse, after getting saddled with so-called hung loans — debt they’d underwritten for deals but were unable to sell until much later, often at huge losses.

Over the course of this year, however, buyout momentum has started to build, prompting forecasts of a record year for M&A in 2026.

Buoyed by improving market sentiment, and credit risk gauges hovering around annual lows, bankers have started to deploy large sums of capital. M&A is now on course for a near-record performance this year, according to Apollo Global Management Inc’s president Jim Zelter, who anticipates a busy first quarter of 2026.

And it’s Wall Street leading the way on the financing, blowing its private credit rivals out of the water with highly competitive terms.

The dual-currency loans backing EA, for example, are expected to pay investors just 350 basis points (bps) more than the benchmark rate, at a discounted price of 99 cents.

The US$9.5 billion of senior debt backing the buyout of medical-device maker Hologic, meanwhile, may come in even lower: 2.75 percentage points over benchmarks, Bloomberg previously reported. Around US$2 billion of the subordinated debt on that transaction was sold to a group of private credit funds at 500bps, with an original issue discount of 99 cents, some of the tightest pricing ever seen on junior liabilities.

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That leaves little room for error or any meaningful buffer against market swings. Even a modest bout of volatility could put the deals under pressure, potentially leaving underwriters and issuers exposed if conditions turn.

Discriminating market

With hefty inflows into credit funds this year and few new-money deals to target, investors have been eager to put money to work. Still, they remain discerning.

Case in point: Wall Street gambled — and lost — on a US$1.64 billion loan for a lottery company backed by a Czech billionaire to fund a majority stake in a fantasy sports operator in Atlanta. Banks fully underwrote the deal in the expectation of strong demand, but limited investor appetite ultimately forced them to absorb much of the financing themselves.

Elsewhere a group of Wall Street banks led by Banco Santander SA reduced the size of a debt offering for private equity firm Thoma Bravo’s acquisition of customer-service automation business Verint Systems Inc after some potential buyers pushed back on the terms.

“We have seen investors showing robust appetite for new paper,” Robb said. “Yet they remain selective, favoring strong credits while passing on weaker assets.”

Managing the flow

It’s been a while since the junk-debt market has seen a flood of big-ticket deals, meaning that bankers look set to stagger deals to avoid market indigestion or fatigue.

Given the size of some these transactions, banks are also likely to distribute them across both the syndicated loan and bond market to make them easier to digest. They are also expected to seek investor demand in both the US and Europe to maximise liquidity and generate competitive tension across regions.

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