By Tom Zanki

Law360 (July 10, 2020, 10:53 AM EDT ) Capital markets deal teams are starting the second half of 2020 ready for more business after a record-breaking six months of activity that seemed impossible at the start of the coronavirus pandemic, although questions persist over how long robust times will last.

Attorneys expect debt and equity financing to remain active even when the volume of deals inevitably slows from its breakneck pace. Simpson Thacher & Bartlett LLP partner Art Robinson said he foresees a "good pipeline of deals forming for July" and later.

"I haven't seen anything slow down in a way that gives me pause that we are not going to have a strong second half of the year," Robinson said. "At the same time, I just don't think we can sustain a nearly $60 billion high-yield market month."

Robinson was referring to proceeds from high-yield bonds — or speculative debt issued by companies with weaker credit ratings than investment-grade companies — which totaled $54.3 billion in June, according to data provider Dealogic. That marked the highest month on record.

The June blitz in high-yield offerings capped a record-shattering first half of 2020 for corporate debt issuance in which companies borrowed $1.07 trillion total, nearly double the $537.6 billion raised in the first half of 2019, according to Dealogic. Investment-grade companies generated the lion's share of that money, led by Boeing's $25 billion bond offering in May, the largest corporate bond of the year and largest ever corporate bond not related to acquisition financing.

The improbable surge in financing came just months after capital markets appeared stalled in early March as the coronavirus pandemic froze economic activity and threw markets into chaos.

But debt activity slowly resumed in late March, led by investment-grade companies with strong credit that were able to borrow money at ultra-low interest rates and bolster their balance sheets.

Debt financing then expanded to more distressed companies, aided by the unprecedented intervention by the Federal Reserve, which committed to rescuing the broader debt market by buying certain high-yield bonds as well as shares of high-yield exchange-traded funds.

Capital markets lawyers say increased access to debt has also provided much-needed breathing room for companies in distressed industries, like hospitality and entertainment, that now have more cash to navigate hard times.

"It showed a remarkable resiliency in our capital markets that we were able to respond so quickly to a life-and-death event for many companies," said Robinson, whose firm worked on high-yield debt offerings for theater chains Cinemark Holdings Inc. and AMC Entertainment Holdings Inc. in April.

As markets turned around, more companies — not just those in distress — took part in debt-raising. Some raised money for a rainy day or lowered their debt costs by refinancing at attractive rates, such as Bausch Health Companies, which borrowed $1.5 billion in May.

"We are seeing opportunistic deals and refinancing deals in the debt markets," said Davis Polk & Wardwell LLP partner Michael Kaplan, who worked on Bausch's high-yield debt offering.

The recovery eventually spread to equity markets, which were more severely set back when the pandemic began. Convertible bonds — hybrid offerings where companies issue debt at low interest rates but allow their investors to convert their holdings into stock if shares rise — soared in April.

Public companies also began raising equity through follow-on offerings as conditions improved.

Paul Hastings LLP partner Teri O'Brien noted that many companies turned to equity markets after considering the federal government's Paycheck Protection Program, an emergency relief measure that provides small businesses with low-cost loans. But after some loans went to large public companies, causing backlash, the U.S. Department of the Treasury issued guidance that PPP loans were limited to smaller businesses that lack access to public capital markets.

This meant public companies "had to shift their focus" and turn to capital markets, O'Brien said.

"There was a renewed interest by companies in the capital markets and they found that the capital markets were there to support them, which was great," O'Brien said.

After a long slump from March though about Memorial Day, the initial public offerings market is now sizzling with a busy summer pipeline. June produced 28 IPOs, the most of any month since June 2015, according to research firm Renaissance Capital.

"Companies that in a lot of cases are quite profitable are looking and saying now is a good time to go sell my equity," said Davis Polk's Kaplan, who advised underwriters on Warner Music Group Corp.'s $1.9 billion IPO in June. "It's become much more of a strong capital market."

Whether the markets can sustain their hot streak is anyone's guess. Lingering pandemic-related fears and the unpredictability of how future spikes in infections could affect capital markets are on everyone's mind.

"The general perception initially was: In the second half, things were just going to open up," O'Brien said. "With the new spikes we are seeing, you are seeing that little bit of uncertainty again."

Robinson of Simpson Thacher said a "little bit of slowdown" and fatigue from market participants are also possible.

"We have every expectation that we are going to remain busy," Robinson said. "It might be at a more sustainable pace unless we see another cessation of business. A lot of people built in a rebound in the second half for the year and didn't account for a second wave."

--Editing by Alanna Weissman and Jill Coffey.

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