Bonds dominate jumbo M&A as loans bridge the gap

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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 RBSDespite 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. 

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