Bonds dominate jumbo M&A as loans bridge the gap
Companies are turning to bonds to fund their acquisitions as part of unprecedented change in financing across Europe.
By Merijn Nederveen, Managing Director, Corporate Advisory, and Christoph Weaver, Managing Director, Loan Capital Markets at RBS Despite ongoing economic challenges, booming liquidity has created attractive financing conditions for the return of large-scale M&A.
We may have seen a recent slowdown in deal activity but hopefully that’s a temporary blip, not a permanent reversal.
Confidence is king with M&A and seems to have picked up in the early part of this year with concerted central bank measures to get more cash into the system. Corporate balance sheets are strong and there is increasing pressure to put them to work for shareholders.
Economic conditions remain fragile though, so it is important to get the fundamentals of acquisition financing right.
Businesses keen to learn lessons from the financial crisis are taking it far more seriously – it is no longer a mere afterthought.
They want to diversify their capital structures, so debt capital markets are becoming more attractive for long-term funding despite the complexities involved getting or managing the required public rating.
These markets are currently in good health in Europe with yields at historically low levels and available across markets, currencies and tenors – in the first quarter of this year, the amount of bonds issued was almost twice as high as loans.
This ‘cheap money’ offers real opportunity for companies’ strategic M&A.
At the same time, major lenders appear well-prepared to help their clients despite more stringent regulatory and capital requirements. High levels of liquidity mean they are keen to put their balance sheets to work for corporates wherever they see the most return within acceptable risk levels. This means favourable prices and lots of opportunity for companies to get good deals.
Businesses are looking to their banks, especially for the initial, short-term bridge facilities that get a deal started and allow them time to access debt capital markets for their longer-term financing needs.
Bridge financing remains a popular way to initially fund an acquisition because it is flexible, enabling companies to complete their anti-trust processes and minimise unnecessary costs if the deal doesn’t work out.
There have already been a number of landmark deals announced this year – including cable company Liberty Global’s purchase of Virgin Media – taking full advantage of the cheap money available in the capital markets.
Another example is Heineken’s purchase of Asia Pacific Breweries for USD6.5 billion, which clearly shows the fundamental shift in how these deals are being funded.
Heineken engaged banks for short-term bridge facilities while using the capital markets for long-term financing. The brewer found the deep liquidity of the bond markets so appealing it went to the trouble of getting a public rating for the first time in its 150-year history.
The brewer also took advantage of another benefit of using bonds – the option of pre‑funding an acquisition, getting the cash in place before completing the deal.
The most successful financings are those where the bridge facility is never drawn and long-term capital is pre-funded in the capital markets. Healthcare company Sanofi did this very successfully for its USD20 billion Genzyme acquisition in 2010.
Sanofi used the US commercial paper market to raise acquisition debt in the capital markets, but it still put in place a USD10 billion bridge facility. This bridge was ultimately never drawn, the company pre‑funded in the capital markets and the term loan was very quickly repaid.
One wider implication of all this is that M&A activity will need greater planning and potentially take more time – especially if a public rating is required. A first-time rating process generally takes around eight to ten weeks.
Acquisition financing is not an absolute science and there is no single, standard structure that will work best every time. Financial markets are continuously evolving and M&A processes are fraught with uncertainty.
Companies will benefit if they engage with their key relationship banks early in the process. This will help ensure they get the best execution across both the bank and capital markets – in the most effective and timely way and at the right price.
The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.
Where the document is connected to Over The Counter (“OTC”) financial instruments you should be aware that OTC derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.
RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.
RBS is authorised in the UK by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC (www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not “Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Business Customer” or “Market Counterparty”.
The Royal Bank of Scotland plc acts in certain jurisdictions as the authorised agent of The Royal Bank of Scotland N.V.
The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.