In a month when JPMorgan announced the largest ever loan to back an acquisition – its sole $20 billion bridge facility for AT&T’s proposed purchase of T-Mobile USA – it seems slightly perverse to be focusing on the bond market’s role in driving M&A volumes. But despite headline loans such as that for the AT&T deal, the bond market is taking an ever more important role in this market – particularly lower down the credit spectrum. This could have worrying consequences further down the line.
The capital markets have always played an important role in US M&A, which has had a record start to the year, with $257 billion of deals inked in the first quarter. Sanofi-Aventis issued a $7 billion six-tranche bond to back its $20 billion buyout of US firm Genzyme, which attracted $17 billion of orders. Another acquisition-driven deal was the $2 billion bond issue from DuPont, part of its $5.8 billion acquisition of Denmark’s Danisco.
But the surge in high-yield issuance in Europe means that the bond markets are now playing an increasingly important role in Europe too – and among private equity buyers as well as corporates. The largest European buyout so far this year – the €3.16 billion takeover of German cable TV company Kabel BW by Liberty Global – has been funded in the high-yield bond market, the company issuing €2.2 billion of bonds at the end of March.
Even loans that are used to underwrite acquisitions will likely be refinanced in the bond market sooner rather than later. It is not hard to fathom why: the result is usually more leverage, less-restrictive covenants and lower pricing.
But Fitch Ratings warned last month that as more cyclical businesses start to tap the high-yield market the quality of LBO companies will fall. Indeed, German bathroom fittings maker Grohe recently refinanced the debt from its 2004 buyout in the high-yield bond market in a deal that was increased from €400 million to €500 million because of demand. Sponsors TPG and Credit Suisse are looking to exit the business, which is single-B minus rated.
It was the liquidity in the high-yield bond market that saved many corporates from insolvency when the credit crunch first bit and the leveraged loan market dried up. But now that both the bond and bank markets are open for business, investor discipline will be sorely needed to prevent trouble brewing in the sector once again.
