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YEARûTERMûLOANûBanks foresee record M&A lending
US M&A lending to blue chip companies could top US$250bn by year-endBank lending for US mergers and acquisitions
of high-grade companies will scale new heights
this year, as the voracious appetite for mega-
deals persists even while credit markets turn
choppy and recession talk surfaces, bankers and
strategists said.
M&A lending to US blue chip companies
could top US$250bn by year end, according
to Thomson Reuters LPC’s quarterly lending
survey, in what would be a record, far surpassing
the prior high of around US$203bn last year.
This year has already seen three of the 10
largest US investment grade bridge loans of all
time – extended to WALT DISNEY for Fox, US cable
company COMCAST’s ongoing bid for European
broadcaster Sky and health insurer CIGNA for
pharmacy benefits manager Express Scripts.
Banks’ liquidity and capacity to lend is
plentiful, particularly after Comcast withdrew
its record all-cash US$66bn bid for Twenty-First
Century Fox media assets on Thursday and
BROADCOM’s US$117bn takeover of Qualcomm
was blocked by President Trump in March.
Broadcom had lined up as much as
US$100bn in bank financing that fell away when
the deal came undone. Comcast had secured
“highly confident” letters from banks, which
indicated the lead arrangers were confident they
could put together financing while the bidding
war with Disney for Fox media assets heated up.
Chipmaker Broadcom is now back in the
market with a much smaller US$18bn term
loan funding its planned purchase of business
software company CA Inc.
A wide range of companies, including media
conglomerate Disney and packaged food
company CONAGRA BRANDS, are in the market
with large M&A financings. Disney has a bridge
loan for up to US$35.7bn and Conagra has
announced a US$1.3bn term loan that reduced
the commitments under its US$9bn 364-day
bridge loan, all of which the loan and bondmarkets are expected to absorb easily despite
the volatility.
“You hear chatter around the peak of
the credit cycle, but it doesn’t seem to have
impacted bank lending appetite on the
investment-grade side,” said Robert Kilcullen, a
managing director in MUFG’s corporate advisory
group.
“The capital markets have gotten a little
choppier, but it doesn’t feel like, particularly
on the investment-grade side, that anyone is
getting shut out or there is any sector that no
one will touch.”ACCESS GRANTED
The M&A deal machine revved up after a federal
judge, in a highly anticipated ruling, in June
gave the go-ahead to the long-pursued merger
between AT&T and TIME WARNER. This month,
the Department of Justice appealed the ruling,
giving lenders a pause although most expect the
tie-up to be upheld and see more mega-mergers
ahead.
Bankers said there is appetite to lend as much
as US$100bn to US$125bn in a single bridge
financing, if such a large deal were to crop up
again. A dozen banks provided the US$100bn
bridge loan for the Broadcom/Qualcomm deal,
which ultimately fell through.
There is also confidence that big borrowers
of short-term bridge loans will readily be able
to access the bond markets when replacing
the loans with permanent financing, despite
turbulence in recent months.
“High-grade companies won’t have problems
going to market,” said one senior banker. “Banks
are still hungry for assets. I don’t see a pullback
from lending happening in the near future.”
If market volatility escalates, and M&A-related
bond supply puts pressure on yield spreads and
pushes borrowing costs higher, that optimism
could fade.For now, “both high grade and high yield
credit investors show so little concern about
fundamentals - or so-called ‘lower quality
trends’ - that it almost appears as if we are in the
early recovery stage after a recession,” a Bank of
America Merrill Lynch Global Research report
said.REWARDS
Banks are reaping profits from the bountiful
M&A lending and are expected to continue to do
so throughout the year.
Fees earned from arranging loans to high-
quality companies reached US$1.5bn in the
first half of the year, a 44% jump from a year
earlier and the highest half-year total on record,
according to Freeman Consulting Services,
which bases its estimates on Thomson Reuters
data.
“Banks are willing to sit on larger
commitments – there are big checks on the
table,” the senior banker said.
The M&A loan bonanza, fuelled by President
Trump’s tax cuts and improving economy, is
financing transformational deals as whole
industries reshape to adapt to threats from online
retailers and grapple with technological change.
“The strength of the M&A market is really
reflected in the types of deals we’re seeing lately- including Amazon buying PillPack to move
into pharma distribution,” said Jeff Nassof, a
director at Freeman Consulting. “These are late
stage transformational deals that we see when
things are really optimistic.”
Online retailer AMAZON triggered a wave
of match-ups last year as it continued to put
companies’ traditional business models under
pressure. Its merger with WHOLE FOODS MARKET,
announced in June 2017, shook up the supply
chain industry and put pressure on grocery
markets.
Lynn Adler