(Corrects details in seventh paragraph.)
By Daniela Guzman
NEW YORK, Oct 22 (LPC) - US corporations hovering above junk territory are gravitating to the highly liquid bank market to fund acquisitions, and maintain their ratings and prepayment flexibility, while keeping market volatility at bay.
When making an acquisition, companies have traditionally used bridge loans that provide temporary certainty of funds or confidentiality ahead of bond issuance.
“Some companies may prefer to issue syndicated loans rather than tap the long bond market for multiple reasons, such as the desire to have pre-payable debt,” said Art de Peña, head of loan syndicate and distribution at MUFG Capital Markets in the Americas. “Many companies are looking to show credit rating agencies that they can generate free cash flow and delever post-merger.”
Macroeconomic uncertainty this year, however, has created pricing volatility in the bond market that triple-B borrowers are unwilling or unable to endure.
These issuers have found the bank loan market open for business which allows them to add larger term loan components to their permanent financings or bypass the bond market entirely by issuing term loans that are cheaper and prepayable.
One notch above junk, triple-B rated companies — borrowers with a rating that ranges from Baa1/BBB+ to Baa3/BBB- — are considered medium-grade investment grade with repayment security that can be risky in the long term.
For example, in October, BBB-/Baa3- rated Energy Transfer Operating LP went straight to the bank market and issued a US$2bn three-year term loan for general corporate purposes. TD Securities was the left lead on the deal and Wells Fargo and Bank of America were joint lead arrangers.
Triple-B companies have issued USD$99.72bn, or 78.4% of total investment grade term loans year-to-date in 2019, according to Refinitiv LPC. Investment grade bridge loan volume, meanwhile, only registered a 1% increase to US$105.87bn year-over-year.
The ability to pay down debt more quickly is also an incentive to tap the bank market for highly rated issuers, who wish to maintain an investment grade rating and benefit from term loan A amortizations.
Borrowers especially vulnerable to geopolitical volatility, such as those operating in the oil and gas industry, are tapping the loan space to fund acquisitions when the bond market could be more volatile or when companies are at risk of losing their investment grade status if they do not delever quickly.
“It’s more heavily levered investment grade companies that are often spending a bunch on significant acquisitions and then need to show a deleveraging profile to achieve ratings outcomes,” said JD DeSantis, partner and Americas capital markets team leader for Shearman & Sterling LLP. “The agencies are holding them to a fairly regimented deleveraging.”
Even more highly rated investment grade names, or companies rated single-A and above, such as biopharmaceutical companies Bristol-Myers and AbbVie, have tapped bridge loans for confidentiality reasons when doing acquisitions. They also have taken advantage of bank appetite to add larger term loan components to their acquisition financings and protect ratings.
AbbVie (Baa2/A-) in July secured US$6bn in unsecured term loans that partially replaced a US$38bn bridge loan for the US$63bn acquisition of Botox-maker Allergan. Bristol-Myers Squibb (A2/A+) also turned to term loans in early 2019 to pay down a US$33.5bn bridge loan that would partly fund its US$74bn acquisition of Celgene Corp.
The US$8bn in term loans could help the company deleverage and protect credit ratings. (Reported by Daniela Guzman. Written by Michelle Sierra. Edited by Leela Parker Deo and Kristen Haunss.)