April 27, 2018 / 6:36 PM / a month ago

Lenders feel benefit of M&A surge

NEW YORK, April 27 (LPC) - Global M&A lending has surged to US$623bn in the year to-date with the addition of a £23bn loan package for US cable operator Comcast’s bid for Sky Plc and is rapidly closing on 2017’s full-year tally of US$884bn as more gigantic international deals line up.

A new jumbo loan backing Japanese drug firm Takeda Pharmaceutical’s US$64bn bid for London-listed rare disease specialist Shire is expected imminently, which will further narrow that gap, and more huge acquisition loans are in the pipeline.

Companies are pushing forward with global expansion plans and putting cash stockpiles to work despite more nationalist and protectionist political rhetoric, as top firms focus on buying growth rather than relying on slower organic growth.

“The aspiration for large scale M&A is there. We have not seen the end of this, based on the types of discussions we’re having with clients,” a senior banker said.

The US$1.55trn of global M&A deals announced so far this year is already 56% higher than all of last year. Cross-border M&A transactions total US$693bn, giving an all-time high of 46% of global M&A activity, according to Thomson Reuters Deals Intelligence.

“People want to do bigger deals,” a second senior banker said. “There’s more certainty, there’s repatriation of cash [back to the US], and interest rates are creeping up so there’s a little bit of a sense of urgency to pull the trigger.”

Bankers are confident about the debt markets’ ability to cope with the rising tide of jumbo loans, citing excellent capital markets conditions with a strong and liquid loan market and relative certainty about refinancing in the bond market.

“With all markets in such good shape, it’s a good time to pursue M&A,” a third senior banker said.

The strong M&A lending numbers are all the more remarkable as they do not include a record US$100bn bridge loan that backed chipmaker Broadcom’s takeover of Qualcomm. The loan was cancelled in March after President Trump blocked the deal over national security concerns.

Lengthy regulatory approval is increasingly an issue for lenders on the hook in more volatile markets. German drugs and pesticides group Bayer had to seek approval from 30 antitrust authorities for its US$62.5bn purchase of US-based Monsanto, the world’s biggest seed company.

The deal, which was announced in September 2016, received regulatory approval from the US Justice Department in early April after the companies agreed to shed some assets.

The proliferation of huge deals is not seen as a problem for the loan market, unless several transactions from the same sector reach the market at a similar time, which could stretch some banks’ risk baskets.

“If you get concentration within sectors that could raise issues for banks and capital markets, but investors’ ability to absorb industry paper is not a concern now or a constraining factor,” the first senior banker said.

WHY NOW?

Bankers have been waiting for another market-defining run of jumbo deals for years, after nearly a decade of sporadic activity. This time, global cross-regional deals are taking centre stage, rather than intra-regional consolidation plays.

There are a host of good reasons for companies to push ahead with deals.

US companies are poised to buy abroad with cheaper access to overseas cash stockpiles under the new tax system, which also reduces US companies’ tax burden and makes them more attractive to foreign buyers who are keen to access stronger US growth.

“There’s growing confidence among large multinationals headquartered in Europe, and the projected growth of the US economy and stability of the US markets, and the lowered tax rate in the US is definitely playing a role in driving buyers’ interest in US companies,” said George Casey, global head of mergers and acquisitions and global co-managing partner at Shearman & Sterling.

The strong dollar is also helping US companies to expand into Europe, while Brexit uncertainty is another factor encouraging some Continental European and Asian firms to look at the US and UK companies to look abroad.

The dollar volume of cross-border deals for European companies buying US targets and vice versa have both doubled in the first quarter from the same time last year, based on Thomson Reuters data.

Asian buyers are currently more inclined to look at European companies where regulatory constraints on their investments are less pronounced than in the US, although curbs on Chinese outbound M&A have depressed Asian acquisition activity.

“One of the clouds over the M&A market in the past, particularly cross-border, was Chinese regulation of outbound investment. Chinese regulators have recently streamlined their approval process for investments outside of China, and hopefully that will facilitate China outbound activity.” Casey said.

Cross-border financing activity in Asia is poised to pick up in the second quarter, largely due to Takeda’s anticipated jumbo loan, which is expected to be lead by Japan’s megabanks - SMBC, Mizuho and MUFG.

(Additional reporting by Prakash Chakravarti and Sharon Klyne.)

Reporting by Tessa Walsh and Lynn Adler Editing by Chris Mangham

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