MarshBerry actively engages with insurance brokers and lenders regarding the availability of debt capital. This week, in Today’s ViewPoint, we’re focusing on comparing the debt markets today to the prior recession.
MarshBerry believes it is instructive to contrast the current economic situation with the previous economic downturn experienced during the Great Recession. In the wake of the financial crisis of 2007 – 2008, the Federal Reserve Bank enacted a zero interest-rate policy (“ZIRP”) in order to stimulate economic activity. The Federal Funds Rate, the benchmark rate for consumer and commercial borrowings, effectively dropped to zero as equity markets plunged, and the fixed-income market seized up.1 The major difference between then and now is that borrowing virtually ceased during the Great Recession for approximately 18 months, during which time corporations had little access to third-party capital to grow their business organically or via acquisitions.
Only after the Great Recession subsided and the debt markets thawed, did companies take on additional debt in order to shore up operations, pursue acquisitions and implement share buybacks.
As the COVID-19 pandemic began to grip the nation in early 2020, the Federal Open Markets Committee (“FOMC”) enacted monetary policy akin to their actions in 2008, lowering the target range for the Federal Funds Rate to 0 to ¼%.2 Uncertainty surrounding the eventual outcome of the pandemic abounded as many industries suffered a precipitous decline in revenue and unemployment reached record highs. Insurance brokers were not immune from the downturn as commission and fee revenue for the public brokers decreased or remained flat on a quarter-over-quarter basis between March and June 2020 while forward-looking projections remain diminished.
However, this is where the analogy with the Great Recession ends. There now appears to be a growing consensus on a schism developing between the ‘haves’ and ‘have-nots’ of the COVID-19 economy. In industries hardest hit by the crisis, historically high leverage levels and poor credit quality from a decade of borrowing have led to a series of high-profile bankruptcies such as The Hertz Corporation and Chesapeake Energy. Despite this, the equity markets recently hit an all-time high and the fixed-income markets (including the high yield debt market) remain open for business amid the backdrop of an ongoing pandemic. Specifically, the Fed poured large amounts of liquidity into the system by buying high yield debt, effectively keeping this market open (as contrasted with the illiquidity crisis of the Great Recession).
Despite ongoing uncertainty concerning the pandemic, the insurance distribution sector should fare more favorably as most insurance brokers should be in a position to access the high yield capital markets should they need added liquidity to operate their businesses. Unlike 2008, the markets have not seized up and debt capital has remained free flowing. Many acquisitive insurance brokers, both public and private, appear to be leveraging the low interest rate environment to fund their ongoing acquisition programs, added by lenders’ willingness to provide capital to supplement brokers’ cash reserves. Since April 2020, Alliant Insurance Services, Inc., AssuredPartners, Inc., BroadStreet Partners, Inc., Marsh & McLennan Companies, Inc., and NFP, Corp. have indicated that recent debt issuances were intended to provide additional liquidity for operations.3 Others, including Achilles Acquisition, LLC (OneDigital Health and Benefits parent), Ryan Specialty Group, and USI Insurance Services, LLC, have issued either term loans or notes with the stated purpose of financing acquisitions.4 While the broader economic outlook may still appear murky (especially for hard hit industries), there are several favorable dynamics backing the insurance distribution space in the capital markets.
Private equity players remain well capitalized and unbridled access to capital in a low interest rate environment serve as positive indicators of further consolidation throughout the downturn, and beyond. As we look back only four months, the outlook is much brighter than we originally forecast.
If you have questions about Today’s ViewPoint or would like to learn more about the debt market, please email or call Gerard Vecchio, Senior Vice President at 212.972.4886.
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3, 4Moody’s Investor Services