Bonds set to take centre stage in M&A financing

Louise Bowman
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Debt capital markets bankers have so far watched the boom in M&A activity with a mixture of envy and anticipation. But they’re increasingly confident that a buyer-led bond boom is on the way.

Anyone considering what the impact of a pickup in M&A activity might have on the global DCM market need look no further than last year’s astonishing $49 billion eight-tranche bond take-out that backed Verizon’s purchase of Vodafone’s 45% stake in Verizon Wireless.

  The extended
five-year trough we had from 2009 to 2013 resulted in significant pent-up strategic demand

Gary Posternack
While no one is suggesting that there is another $50 billion bond deal in the works, the M&A backlog in investment grade DCM is now that size and is being seized upon by DCM bankers as a rich source of imminent deal flow in both investment grade and high yield.

" M&A has taken centre stage as a driver of supply," says Marc Fratepietro, head of US investment grade coverage at Deutsche Bank. "M&A-driven DCM issuance was down in the first half of the year due to a lag factor and because a good number of M&A deals have been more equity-heavy. We are now seeing more debt-heavy M&A announced and see an investment-grade M&A financing backlog of at least $50 billion."

Despite still surging equity markets, there is certainly a sense within DCM that the bond market is set to take a more central role in deal structures. "M&A is the missing part of the puzzle that people have been waiting for in DCM," says Tommy Mercein, global head of DCM at Credit Suisse. "The consensus has been that both stocks and rates are biased to rise, so issuing a bond to buy a stock makes a lot of sense."

Globally announced M&A for 2014 had reached $2.5 trillion by the end of August, so it is scant surprise that dealmakers are falling over themselves to grab a share of the spoils. "The acceleration of activity this year has been sharper than in previous cycles," says Gary Posternack, head of global M&A at Barclays. "The last 20-plus years have seen a series of cycles involving a two-year downturn followed by a six-to seven-year upturn. The extended five-year trough we had from 2009 to 2013 resulted in significant pent-up strategic demand, which has had a dramatic impact on the market this year."

Despite the huge cash balances that many acquiring firms already hold and strong competition from the equity market, many feel that there is a good opportunity for DCM. "In investment grade by definition there will be a sufficient quantity of equity to maintain the rating," says Mercein. "But even a single-A rated M&A deal can have $15 billion to $20 billion of debt attached to it."