Mega Deals Test Limits of Debt Boom With $250 Billion Pipeline

Wall Street’s dealmakers are about to find out how much longer the seven-year corporate-debt binge can last.

With two mega mergers announced the past two days, debt investors will be asked to lend as much as $120 billion to finance the combinations of brewers Anheuser-Busch InBev NV and SABMiller Plc and tech giants Dell Inc. and EMC Corp. The transactions would, respectively, bring the largest corporate-bond sale ever as well as a record offering by a junk-rated issuer. The trick will be finding ample demand for those deals -- along with at least $130 billion of bonds and loans in the works -- in a market that’s recently had a bad case of indigestion.

“If we get one or two of these to swallow a month, the market will likely bear it,” said Andy Toburen, a high-yield money manager at Chartwell Investment Partners, which oversees $8.1 billion in assets. “If it comes all at once, it will prove to be too much."

Companies have been rushing to take advantage of cheap borrowing costs in the U.S. before the Federal Reserve moves to lift interest rates from zero for the first time since the 2008 financial crisis. Almost $1.1 trillion of investment-grade bonds have been sold this year, putting 2015 on course for an annual record.

Strains Emerge

Strains have been emerging more recently, though. Just one junk-rated corporate issuer has managed to sell debt this month, a pace that would make it the slowest October on record, according to data compiled by Bloomberg. The drought comes after a third quarter that handed high-yield bond investors a 4.9 percent loss, the worst three-month period since 2011, Bank of America Merrill Lynch index data show.

The turmoil is causing those cheap borrowing costs to fade quickly. The average extra yield investors demanded to own company debt -- from the riskiest to the most-creditworthy -- climbed to as much as 2.74 percentage points this month, the highest in three years. Bond buyers have been particularly concerned about the effects of a commodities slump that has left miners and oil producers struggling to manage record amounts of debt they took on to fund production.

Investors have redeemed a net $8.9 billion from U.S. high-yield funds this year while U.S. mutual funds and exchange traded funds that buy leveraged loans have seen about $11.7 billion of net outflows, according to Lipper. Meanwhile the creation of collateralized loan obligations, the biggest buyers of high-yield loans, has slowed.

All of this is starting to disrupt the riskiest debt deals. Fullbeauty Brands LP, an apparel retailer for plus-sized people, is offering one of the biggest discounts this year to complete its $1.2 billion loan deal financing its buyout by Apax Partners, three people with knowledge of the deal said Tuesday.

‘Trouble Spots’

Canadian company SunOpta Inc. and machine-parts maker NN Inc., both pulled bond deals this month after struggling to attract investor interest, meaning they’ll now be leaning on their banks for backup financing for acquisitions.

"Those that have pushed the envelope from a leverage standpoint and appear to be relying on synergies and cost-savings, those are potential trouble spots," Toburen said.

But even as the markets cool, the pipeline of bank financing commitments that will ultimately need to be taken to debt investors continues to bulge.

EMC Financing

Junk-rated Dell’s raising up to $49.5 billion to fund its purchase of EMC, the largest tech deal ever, according to a filing on Tuesday. The acquisition, expected to close by next October, will rely on a mix of investment-grade and speculative-grade debt, said a person with knowledge of the financing. Even if just a quarter of that is raised in the U.S. high-yield market, it would top the record $8.5 billion issued by Valeant Pharmaceuticals International Inc. this year.

AB InBev is working with about 10 banks to arrange as much as $70 billion of financing for its $106 billion takeover. BlackRock Inc. money manager Owen Murfin said last month that about $60 billion would need to be raised in the bond market, which would exceed the record $49 billion issued by Verizon Communications Inc. in 2013.

“It could create some interesting opportunities if you have some overhang in the market," said John Popp, who oversees about $38 billion of speculative-grade debt as chief investment officer of Credit Suisse Group AG’s credit-investment group. “The trick is trying to assess the timing of this,” he said. Investors, he said, won’t “want to be sitting on cash too long to make room for upcoming deals.”

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