Record $1 Trillion Cash Haul to Spur Euro Growth: Credit Markets
Companies in Europe have amassed almost $1 trillion through earnings, bond sales and by refinancing credit lines, foreshadowing a potential surge in acquisitions and investment.
Glencore Xstrata Plc, Siemens AG (SIE) and Daimler AG (DAI) are among at least 50 companies in the region that refinanced 143 billion euros ($194 billion) of credit facilities this year paying an average interest margin of 0.59 percentage point, the lowest since 2007, according to data compiled by Bloomberg. Lower debt costs have helped Stoxx Europe 600 Index members accumulate more than 600 billion euros in cash, adding an extra 200 billion euros since 2008, as companies hoarded profits and shied away from takeovers during the region’s longest recession.
Europe’s biggest firms now have ammunition for growth after almost five years of central bank stimulus measures and suppressed borrowing costs. Almost 70 percent of executives expect company mergers and acquisitions to increase in the next 12 months and more than half said growth is their primary focus, according to an October survey of 1,600 decision makers by EY, formerly known as Ernst & Young.
“CEOs and boards realize that they can’t afford to stand still in these markets,” said Jose Linares, the London-based head of JPMorgan Chase & Co.’s global corporate bank in Europe Middle East and Africa. “Confidence is always the most important trigger of activity.”
Sentiment toward European credit has improved with investors emboldened by signs of tentative economic growth and after European Central Bank President Mario Draghi’s surprise decision to cut interest rates to a record low of 0.25 percent on Nov. 7.
Gross domestic product in the euro area rose for a second quarter, increasing 0.1 percent in the three months through September, following a 0.3 percent expansion in the previous three-month period. The inflation rate slowed to the lowest level in four years in October, prompting the ECB to cut its benchmark rate.
Profit at Stoxx Europe 600 Index companies will climb to 21.83 euros a share this year, according to the average analyst estimate in a Bloomberg survey. That would represent a 9 percent increase from 2012 and would be the most since reaching 29.32 euros in 2007, the data show.
The average yield investors demand for junk-rated bonds fell below 5 percent for the first time last week, according to Bank of America Merrill Lynch index data. Yields on investment-grade notes are approaching a five-month low of 1.99 percent, the data show.
More than half of European investors in a Fitch Ratings survey expect mergers and acquisitions to rise next year as the economy recovers and as companies become more willing to use cash reserves, the ratings company said in a Nov. 14 report, citing a survey of money managers with about 7 trillion euros of fixed income assets.
“The overall percentage of respondents expecting moderate or significant use of cash to fund M&A activity was at its highest level for more than two years,” Monica Insoll, the London-based managing director for credit market research at Fitch, wrote in the report. “The rate of activity is also likely to be accelerated by a closing window for companies to raise low-cost debt.”
Europe’s investment-grade borrowers are negotiating the lowest pricing on revolving credit lines and term loans since 2007. The average interest rate paid for corporate loans has fallen to 83 basis points, or 0.83 percentage point, from 132 basis points in 2012, according to Bloomberg data. Average margins on revolving loans has dropped to 59 basis points from 114 basis points last year, the data show.
Money in a revolving credit facility can be borrowed again once repaid, while in term loans it cannot.
Glencore Xstrata obtained $17.3 billion of loans in June to replace existing facilities with better terms, data compiled by Bloomberg show. In 2012, Glencore offered to pay interest of 175 basis points more than benchmark rates for a three-year revolver, the data show. A year later it agreed to pay a 90 basis-point margin for a three-year facility.
The world’s biggest publicly traded commodity supplier will use the facility to help with day-to-day trading, bankers told Bloomberg at the time. The proceeds will also support its capital programs, according to a Nov. 8 report by Investec.
Glencore may decide to use an estimated $6 billion of surplus cash generated by the end of 2014 for acquisitions or to restart capital projects on hold, Investec analysts Marc Elliot, Hunter Hillcoat and Albert Minassian wrote in the report. Glencore spokesman Charles Watenphul declined to comment on the company’s debt or expansion plans.
Daimler arranged a 9 billion-euro credit line in September with a 27.5 basis-point margin. The new loan replaces a 7 billion-euro facility that paid a 60 basis-point margin, which was due to mature in October 2015, Bloomberg data show. Chief Financial Officer Bodo Uebber said Sept. 26 the company decided to refinance its loan two years early because of “favorable market conditions.”
Siemens got a $3 billion loan in September with interest of 20 basis points more than benchmark rates, 10 basis points less than it pays on a 4 billion-euro facility agreed on in 2012, Bloomberg data show. Royal Dutch Shell Plc is currently seeking a $6 billion credit line with a 12.5 basis-point margin to replace an existing facility, three people familiar with the deal said on Nov. 14.
Takeovers announced by western European companies have risen 6 percent to $716 billion this year compared with 2012, according to Bloomberg data. That’s less than half the record $1.5 trillion of deals completed in 2007.
“Corporates have deleveraged generally, they’ve been putting their house in order and getting themselves incredibly flexible, but they haven’t then had the boldness yet to do the big M&A or big capex programs,” said Nicholas Bamber, head of western European debt capital markets origination at Royal Bank of Scotland Group Plc in London. “Companies are starting to try to make the moves they’ve been planning for the last three years.” Shire Plc (SHP) obtained a $2.6 billion loan from Morgan Stanley to finance its acquisition of ViroPharma Inc., including a $1.75 billion term loan with margin of 75 basis points more than benchmark rates, the Dublin-based drugmaker said Nov. 12. Shire said it will also draw on its $1.2 billion revolving credit facility to pay for the $4.2 billion all-cash purchase.
In the U.S., Verizon Communications Inc. obtained $14 billion of loans and sold a record $49 billion of bonds in September to back its purchase of a 45 percent stake in its wireless unit from partner Vodafone Group Plc.
“The Verizon-Vodafone deal tells you that multi-billion dollar M&A financing is there, and could be done on the same scale in Europe for the right names,” Michael Grayer, Lazard Ltd.’s head of debt advisory in London. “Corporates have more confidence as the economic outlook improves, and are well aware financing is in place.”
Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. rose for a second day, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, increasing 0.4 basis point to a mid-price of 69 basis points, according to prices compiled by Bloomberg. The index has climbed from 68 on Nov. 25, the lowest level since November 2007.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 0.6 to 76 at 10:07 a.m. in London. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan decreased 0.5 to 132.
The indexes typically rise as investor confidence deteriorates and fall 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 debt-market stress, fell 0.13 basis point to 8.5 basis points. The gauge typically widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate debt.
Bonds of Morgan Stanley (MS) were the most actively traded dollar-denominated corporate securities by dealers yesterday, accounting for 3.1 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, fell 0.02 cent to 98.15 cents on the dollar. The debt, which reached an almost six-year high of 98.88 cents in May, has returned 4.54 percent this year.
Leveraged loans and high-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.
In emerging markets, relative yields narrowed 3 basis points to 351 basis points, or 3.51 percentage points, according to JPMorgan’s EMBI Global Index. The measure has averaged 316 this year.
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