An acquisition spree is triggering the most high-grade loans since 2008 as cash-rich companies exploit a collapse in the value of their targets.
G4S Plc, the world’s largest security provider, last week raised $6 billion to buy ISS A/S, increasing the amount of loans for purchases by European investment-grade firms to $43.2 billion, the most in three years, according to data compiled by Bloomberg. The deal follows SABMiller Plc’s $12.5 billion loan to fund the brewer’s takeover of Australia’s Foster’s Group Ltd. announced Sept. 21.
The European debt crisis has wiped out $7.3 trillion of value from global stock markets since July as the region teeters on the brink of recession. That’s been a boon for borrowers financing takeovers in the high-grade loan market at an average 111 basis points more than benchmark rates, compared with 121 basis points last year. A basis point is 0.01 percentage point.
“With equity markets at their current levels, there are quite a lot opportunities for large corporates to extract synergy from acquisitions,” said Volkhardt Kruse, London-based head of syndications and sales at Commerzbank AG. “They are likely to become more proactive over the next year in pursuing the specific targets or regions they have been looking at for the past one to two years.”
The 1,000 biggest non-financial European companies by market value have amassed about $1.3 trillion in cash, according to Bloomberg data.
“Many investment-grade companies have built a strong war chest,” said Simon Allocca, London-based head of loan markets with Lloyds Bank Corporate Markets. “Banks remain very supportive to provide debt financing for acquisitions, so we should be able to see more takeovers next year.” Exporters of commodities including oil and gas, drug companies and retailers are likely to be sought-after targets, he said.
Loans to Crawley, England-based G4S are being offered at 55 to 225 basis points more than benchmark lending rates, according to a regulatory filing. Deutsche Bank AG, HSBC Holdings Plc and Royal Bank of Scotland Group Plc underwrite the loans, denominated in euros and pounds. G4S is rated BBB by Standard & Poor’s.
By comparison, loans to ISS pay 200 to 425 basis points, according to Bloomberg data. The Copenhagen-based cleaning services company is rated three levels below investment grade at BB- by S&P.
Filling Refinancing Gap
Speculative-grade borrowers such as ISS face more than 200 billion euros ($276 billion) of leveraged loans that begin coming due after 2013, Fitch Ratings said in an Oct. 19 report. As banks curb lending and investors flee riskier debt, takeovers by investment-grade acquirers may help stave off future defaults associated with the so-called maturity wall, according to Fitch.
“Large European corporates continue to exhibit high cash balances that are readily deployable in search of complementary assets,” Fitch analyst Julian Crush said in the report. “Strategic sales of large industry leaders to cash-rich corporates will help” cut leveraged loans refinancings.
G4S plans to refinance about 3.12 billion pounds ($5 billion) of the new loans with bonds by the end of 2013 and may replace its credit lines in 2014, a person with knowledge of the deal said on Oct. 17.
“Banks will continue to support the long-term goals of large corporates notwithstanding the debt crisis, especially those having good access to equity or bond markets to take out the loans quickly,” Kruse said.
ISS, the world’s fourth-largest private employer, retreated from plans earlier this year for an initial public offering because of weak capital markets. Apax Partners LLP in January dropped a 6.4 billion-euro bid for ISS, according to two people familiar with the talks at the time.
Credit-default swaps linked to ISS’s debt tumbled 329 basis points to 355 since the company’s Oct. 17 agreement with G4S, according to CMA in London. A basis point on a credit-default swap protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.
SABMiller’s loan is the biggest acquisition financing in Europe since French drugmaker Sanofi obtained $15 billion in October for its offer to buy Genzyme Corp., according to Bloomberg data.
Larger companies “will be watching market conditions very closely in the next few months,” Kruse said.