Merger Loans Most Since 2008 as AB InBev Borrows: Credit Markets
Companies are borrowing the most in the loan market since 2008 to finance acquisitions worldwide, betting that they can quickly replace the debt with permanent financing as yields on corporate bonds fall to records.
Anheuser-Busch InBev NV (ABI), the world’s biggest brewer, obtained $14 billion in credit to buy Mexico’s Grupo Modelo SAB, and Nestle SA (NESN) raised $8.5 billion for Pfizer Inc.’s baby-food unit, pushing loans for mergers to $221 billion this year, up 34 percent from the same period of 2011 and the most since $276 billion four years ago, data compiled by Bloomberg show. Anheuser-Busch sold $7.5 billion in bonds last month that will partly repay the loans, while Nestle plans to do the same within 12 months.
While loan costs are rising, yields on bonds are falling, declining below 3 percent this week for the first time. Interest on short-term credit average 1.29 percentage points more than benchmark lending rates, up from 1.19 percentage point a year ago, Bloomberg data show.
“The formula of banks providing a short-term loan bridge to bonds for corporate acquisitions has worked exceptionally well this year,” said Graham Lofts, the London-based head of international loan origination at Commerzbank AG. “Funding and regulatory pressures are making bank debt more expensive, but this new paradigm is not going to stop corporates from making important strategic moves.”
More stringent capital requirements introduced by regulators to prevent lending practices that exacerbated the financial crisis have made it more expensive for banks to extend loans, and prompted lenders in Europe to pledge more than $1 trillion of balance-sheet cuts.
Yields on company bonds globally fell to an unprecedented 2.998 percent as of July 31, from 3.014 percent a day earlier, according to Bank of America Merrill Lynch Data. The gauge was at 3.98 percent at year-end and 3.64 percent a year ago.
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. rose, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, adding 3.1 basis points to a mid-price of 108.7 basis points as of 11:26 a.m. in New York, according to prices compiled by Bloomberg.
The measure typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The U.S. two-year interest-rate swap spread, a measure of bond market stress, increased 0.3 basis point to 21.05 basis points as of 11:26 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
Bonds of Goldman Sachs Group Inc. are the most actively traded dollar-denominated corporate securities by dealers today, with 85 trades of $1 million or more as of 11:27 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Companies worldwide raised $2.27 trillion from bonds this year, up 2 percent from the same period of 2011, according to Bloomberg data. In Europe, bond sales overtook new loans this year for the first time, according to a Fitch Ratings report from July 3. Note deals made up 52 percent of the 467 billion euros ($571 billion) of new corporate funding in the first half of this year, compared with 29 percent for all of 2011.
Within two weeks after announcing on June 29 its plan to obtain $14 billion loans for the purchase of a 50 percent stake in Grupo Modelo, Leuven, Belgium-based InBev sold $7.5 billion of notes to fund the deal with coupons at the lowest on record for bonds of similar maturities issued by the company.
The maker of Budweiser and Stella Artois agreed to pay interest at a margin ranging from 110 basis points to 240 basis points if it uses a three-year $8 billion loan. The $1.5 billion in 0.8 percent, three-year bonds it sold last month were priced to yield 33 basis points more than the London interbank offered rate if swapped into floating-rate debt.
Nestle, the world’s biggest food maker, obtained an $8.5 billion 364-day loan in July as a backup facility for its $11.9 billion takeover of Pfizer’s baby-food unit.
The Vevey, Switzerland-based company will pay interest at 20 basis points more than benchmark lending rates to use the funds, which is double the margin it agreed to pay for a 4.5 billion-euro credit line last year, according to Bloomberg data.
Lenders led by Citigroup said Nestle plans to cancel the loan within 12 months with bond sales.
“These companies are taking advantage of attractive valuations and very low bond funding costs to expand,” said Suki Mann, credit strategist at Societe Generale SA in London. “Any new supply coming from these well-known blue chips will provide existing bondholders a chance to top up their exposure or for new investors to get in.”
InBev’s move to sell bonds to lock in half of the funding for the Modelo acquisition more than five months before the deal closes may be a signal of management’s concern that debt might not be as cheap again when it actually needs it, research firm CreditSights Inc. said in a July 11 note.
“The market is not concerned that the recent increase of M&A deals may be an ominous sign that we are heading back towards a debt fueled acquisition path,” said Societe Generale’s Mann. “What we are seeing is a few opportunistic deals.”
Companies sold $78.8 billion of bonds for acquisitions and bridge-loan repayments this year, compared with $76.4 billion a year earlier, Bloomberg data show.
While borrowing for mergers is on the rise, the volume of deals is down. Companies worldwide announced $978.6 billion of acquisitions this year, including $556 billion in the second quarter, compared with $1.2 trillion in the same period of 2011, data compiled by Bloomberg show.
China surged more than six times to $5 billion and Japan rose at least 35 percent to $10 billion after Tokyo-based Dentsu Inc. got 395.8 billion yen ($5 billion) of loans to finance its purchase of Britain’s Aegis Group Plc. (AGS), Bloomberg data show.
“Cash-rich Japanese corporates including large trading houses have more than doubled overseas acquisitions this year,” said Michael Potter, assistant general manager at Sumitomo Mitsui Banking Corp. in London. “This is a trend that is set to continue. Europe has long been the favorite destination for Japanese acquirers on the lookout for assets. The relatively strong yen has spurred Japanese companies into M&As.”
The yen has advanced 14.7 percent against the euro and 3.2 percent against the pound the past 12 months. China’s yuan rose 5.96 percent against the pound and 17.7 percent versus the euro.
Cnooc Ltd. (883), China’s biggest offshore oil and gas explorer, is seeking about $5 billion of short-term loans to fund its $15.1 billion offer to buy Canada’s Nexen Inc. (NXY) in the largest overseas bid from a Chinese company, according to two people familiar with the matter.
“China’s vast foreign currency reserves need to be put to work and an increasingly stronger yuan is making European and U.S. assets cheap,” Potter said. “The European market has the attraction of being more diversified than the U.S. and with the Eurozone in trouble, there are chances to pick up cheap assets.”
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