M&A Boom Eludes Loan Desks as European Deals Favor StockStephen Morris and Sally Bakewell
Syndicated loan bankers in Europe are missing out on the biggest boom in mergers and acquisitions since 2007 as companies shun the market to fund transactions with stock.
Deals more than doubled to $484 billion in the last three months from the same period in 2013, while loans funding takeovers totaled $58 billion, according to data compiled by Bloomberg. Companies used stock for more than 60 percent of ventures compared with an average of 14 percent since 2008.
“There hasn’t yet been as much M&A financing activity as the market would have wanted,” said Keith Taylor, head of loan syndicate for Europe, Middle East and Africa at Barclays Plc in London. “That’s partly a function of corporate borrowers having a high proportion of cash and stock deals that require less financing.”
Europe’s syndicated loan market has shrunk by almost half since 2007 as banks held back lending to meet new capital rules and as borrowers sought alternative sources of funding. With the global value of shares climbing to a record $65.6 trillion, companies are taking advantage of higher stock prices to fund mergers and acquisitions.
Holcim Ltd.’s $40 billion merger with Lafarge SA, the largest deal in Europe this year, was paid for entirely in stock. And while Bayer AG’s proposed purchase of Merck & Co.’s consumer care business is backed by $14.2 billion of syndicated loans, $12.2 billion of that is to be refinanced with bonds, according to banks arranging the debt.
Borrowers are heading to the bond market because it offers cheaper pricing and looser restrictions, according to Ranbir Singh Lakhpuri, a London-based portfolio manager at Insight Investment Management Ltd., which manages the equivalent of $506 billion. Borrowing costs for junk-rated companies fell to a record 3.56 percent in Europe in May, while average yields for investment-grade debt bottomed at 1.47 percent last week, according to Bank of America Merrill Lynch index data.
Billionaire Patrick Drahi’s Altice SA and Numericable Group SA raised more than $16 billion in the high-yield bond market in April to fund the acquisition of Vivendi SA’s SFR unit, according to data compiled by Bloomberg. That allowed him to cut the amount of cash borrowed from banks to $6.4 billion from about $8 billion.
Loans to fund leveraged buyouts declined to $20 billion in the last quarter, down 15 percent from the same period in 2013, data compiled by Bloomberg show. Issuance of junk-rated bonds jumped to $70 billion from $26 billion.
The dearth of new loans has resulted in a “savage compression” in pricing as banks compete for deals, Peter Ellemann, the London-based head of European loan syndications at Australia & New Zealand Banking Group Ltd., wrote in a report in April.
Interest margins for investment-grade borrowers narrowed to an average 0.78 percentage points more than benchmark rates this year, the least in seven years, data compiled by Bloomberg show. Margins on leveraged loans in euros fell to 4 percentage points from 4.53 percentage points a year earlier.
“No deals have failed this year in the loan market, which is helping drive pricing down,” said Sean Malone, the London-based head of Europe, Middle East and Africa loan syndications at Mitsubishi UFJ Financial Group Inc. “Borrowers have access to almost limitless funds from all parts of the capital markets.”
Europe’s bankers are left recycling old loans, with about 80 percent obtained by investment-grade companies in the last three months being used to refinance existing debt, Bloomberg data show. Almost all were revolving credit facilities, where money repaid can be borrowed again. Because such deals often remain undrawn, they’re less lucrative for banks than term loans and M&A financing.
The biggest credit line arranged in the last quarter was for Glencore Xstrata Plc. The global commodity trader obtained $15.3 billion of loans to refinance existing debt at a lower interest rate, the data show.
“A lot of deal flow and volume has been a reworking of existing deals rather than newer, event-driven activity that would be more exciting and remunerative for the market,” said Barclays’s Taylor.
To help revive the market, the European Central Bank last month introduced a 400 billion-euro liquidity plan that’s designed to offset capital regulations. It allows lenders to borrow cheaply from the ECB to encourage them to extend new loans to businesses.
The ECB’s actions will have a limited effect on the leveraged or corporate syndicated loan markets, according to Roland Boehm, the Frankfurt-based head of Commerzbank AG’s debt capital markets loans unit. “We don’t have a supply problem. Credit demand is the problem.”