Finance 2017: Looking back and moving forward
PNWA Managing Director Jeff Hoyt (email@example.com) Corporate Finance: In 2017 we saw 10-year treasury yields move up and down and then end the year essentially flat at 2 ½ %. This despite the fact that the Fed Funds rate range was increased three times during the year by the Fed. So, the spread between funds and the 10-year compressed to 98 bp’s at year end against our expectations from last January. Historically this type of movement is the forerunner of an economic downturn. Yet the stock market has, by most measures, rallied strongly into the year-end reflecting investor expectations of continued strong economic growth. The Tax Act signed in December will deliver a strong stimulus to offset the drag caused by higher rates particularly as the fed has indicated a likelihood of three further rate hikes in 2018. The combined effect of increased Treasury borrowings and gradual shrinking of the Fed balance sheet should push the 10-year north of 3% by yearend. In a historical context 3 to 3 ½ % 10-year Treasury yields remains low and accommodative to general economic activity.
Low rates strong economic growth and favorable tax policy should bode well for business owners looking for exit strategies. However, it remains to be seen how the small business interest deduction limitations (say that three times quickly) will impact the buyout market. The 30% of EBITDA moving to EBIT will limit the attractiveness of debt finance and thus multiples in some buyouts. The guidance to be issued by Treasury in the coming months will be very valuable to market participants. Repatriation of offshore cash by domestic corporations could add substantial impetus to strategic buyout activity versus private equity buyers.