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NEW YORK Banks losing fees from a string of mega-mergers scuttled by U.S. antitrust rulings are still eager to extend loans to investment-grade companies seeking big tie-ups, in the hope they will ultimately profit by winning business down the road.
President Donald Trump's administration is expected to be more lenient toward large corporate marriages, but policy shifts and scarce details on tax and financial regulatory overhauls are keeping borrowers waiting for a few sizable acquisition test cases to break the ice.
Numerous merger bids, including the telecom giant AT&T’s pending $85.4 billion takeover of media company Time Warner, have faced prolonged regulatory scrutiny or in other cases have been canceled. However, banks don’t want to miss out on potential mergers and acquisitions (M&A) fees.
“Take AT&T and Time Warner for instance,” a senior banker said. “A lot of people think that deal may not happen. But you want to be in if it does.”
While the willingness to lend persists, the barriers to completing major deals have been high.
In February, planned combinations between health insurers Aetna and Humana, and Cigna and Anthem were scrapped after separate court rulings that the deals would stifle competition.
Each transaction was backed by multibillion dollar bridge loans.
“For very large transactions where market share concentration becomes an issue, I would assume the government will view those closely,” said Art de Pena, managing director and head of distribution, trading & agency for MUFG’s syndications group.
“However, that will not deter banks from supporting their clients in those M&A financing.”
Hovering over dealmakers is uncertainty about corporate tax rates, an equity market rally that makes mergers more expensive and the U.S. crackdown on tax inversion deals that helped unravel the $160 billion pharmaceuticals tie-up between Pfizer and Allergan last April, another senior banker said.
Last year a record $804 billion of M&A transactions were pulled globally, the vast majority of which were investment-grade deals. U.S. transactions accounted for about 70 percent of that total, according to Thomson Reuters LPC data.
Still, U.S. investment-grade issuers borrowed a record $182 billion in M&A-related financing in 2016, topping the prior year’s record $181 billion and the $174 billion in 2014.
High quality loan issuance so far this year has been fairly dormant. Banks in January syndicated $21.7 billion of investment-grade loans, the lowest of any month in four years.
In every canceled M&A transaction corporations bear the bulk of the costs, including sizable breakup and litigation fees, that are typically far greater than lost bond or M&A advisory fees or income unearned on monies tied up in loan commitments for extended periods, bankers and attorneys said.
Cigna, for example, is suing Anthem for a $1.85 billion breakup fee and $13 billion in damages.
Fees earned on arranging bridge loans for acquisitions are comparatively small. A portion of those -- the loan underwriting fees -- are usually paid early so even if a deal takes time to close or gets pulled the arranging banks still get to cash in.
Bond fees and M&A advisory fees are richer and are generally lost when the deal gets canceled, unless, as in Aetna’s case, the company has issued bonds already.
In 2015, Aetna agreed a $3.2 billion three-year term loan and then the following year took a $13 billion eight-part bond. Proceeds from the term loan and bonds replaced the $16.2 billion senior unsecured bridge facility provided by Citigroup and UBS.
The insurer started redeeming the bonds on February 14 after the company said that it would terminate the merger agreement because a U.S. federal court ruled against the deal earlier this year, according to IFR.
For a generic $5 billion cash bid financed in the investment-grade debt capital markets, financing and advisory fees could total $80 million to $90 million, according to Freeman Consulting Services. However, only about 25 percent of this potential fee will be paid regardless of the bid’s success.
Most of the income depends on the deal’s successful closing, including the vast majority of the advisory fees that could be about $50 million, split among advisors to the acquirer and target for this same-sized deal. Banks could also earn $20 million for underwriting $4 billion of investment-grade bonds as permanent financing, according to Freeman.
For lenders, sitting on large commitments for extended periods can be expensive and may limit the amount of capital that can be deployed elsewhere, said Jason Kyrwood, partner at Davis Polk.
Lenders typically manage this risk, usually aware of the uncertainties surrounding a deal of such magnitude.
“Until the market really deteriorates materially to where you don’t have faith that the capital markets will be there to take out a bridge, banks are going to want to support their core relationships and you’re going to see them lean into doing these kinds of transactions,” a third senior banker said.
While the pace of M&A is widely seen picking up this year, the timing is highly speculative based on the broad array of potential policy changes under the Trump administration.
In the meantime, most banks will keep fostering long-term partnerships with corporations despite potential transactional disruptions.
“Our view is that relationship lending to the investment-grade client is still very important,” said de Pena. “The depth of the relationship will drive our ongoing support.”
(Reporting By Lynn Adler and Michelle Sierra, Editing by Christopher Mangham and Leela Parker Deo)