LONDON, Dec 16 (IFR) - The European market could take a big chunk out of a bursting M&A pipeline in 2017 after it proved its mettle against the US dollar market in 2016, further cementing the region’s role for corporate financing.
Several M&A-related bonds are heading Europe’s way in 2017, according to bankers, after borrowers such as AB InBev and Verizon demonstrated the depth of investor demand for their jumbo multi-tranche bonds.
“European M&A related flow is expected to pick up next year and therefore financing needs could be exponentially higher,” said Lorenzo Frontini, head of FSG in Europe, Middle East and Africa at Deutsche Bank.
“With a constructive new issue environment, issuers will try and maximise the opportunity with focus on their respective domestic markets, targeting investors based in their home jurisdiction.”
Cheaper funding costs and increased demand have enticed companies into the European market since the ECB launched its Corporate Sector Purchase Programme on June 8.
The central bank’s decision to extend the programme until December 2017 will further bolster momentum, on the expectation that credit spreads will be well supported.
“We will also see opportunities for M&A takeout across different investor bases structured to minimise price breaks,” Frontini said.
Those anticipated to issue M&A-related bonds include Bayer, which said it will sell a mix of senior and hybrid debt to help finance its US$66bn takeover of US seed company Monsanto.
Bayer expects to close the transaction by the end of 2017.
Europe offers a well-tested hybrid market, widely used by issuers to fund aggressive corporate strategies.
Hybrids, which receive 50% equity credit at the major rating agencies, are seen as a way for companies to raise cheap equity while defending credit scores.
“Although M&A activity has slowed recently, we see opportunities in select credits where management is committed to maintaining an investment-grade rating, which we believe will provide attractive spreads going forward,” said Nathaniel Barker, co-head investment grade corporate credit at Barings.
Others expected include AT&T, which has agreed to buy Time Warner for US$85.4bn. The company said it would finance the purchase with new debt and cash on its balance sheet, and has an 18-month commitment for an unsecured bridge facility for US$40bn.
Investors are not expecting any action in the euro market in the first quarter of the year due to the bridge being in place, but are anticipating around US$30bn to be issued across US dollar and euro debt.
British American Tobacco is also expected to add to the upcoming deluge of M&A-linked supply, after it made a US$47bn bid for the rest of US tobacco company Reynolds American it does not already own.
The initial bid was rejected by Reynolds and BAT is reportedly in negotiations to raise its offer, according to Reuters.
Investors expect most of the financing to be placed in the US dollar market, but say the low cost of euros could mean they issue a reasonable chunk in euros in early 2017.
Europe has traditionally played second best to the US market, which is known for easily absorbing multi-tranche multi-billion trades.
But M&A issuance in 2016 proved that borrowers could achieve the same size and demand they have been accustomed to in the US market, paving the way for more momentum-based supply in Europe.
AB InBev printed the biggest ever corporate bond in the European market in March, with the 13.25bn debt splurge attracting 31bn of orders.
The following month, Air Liquide raised 3bn to fund its US$13.4bn takeover of US peer Airgas, while later in the year Danone and Verizon sold respective 6.2bn and 3.75bn-equivalent deals.
“The M&A wave is picking up in Europe, we’ve already seen a lot in the pharma sector so I would be surprised to see more there, but we expect to see a pickup in euro M&A overall,” said Matthew Rees, senior credit analyst at LGIM. (Reporting By Laura Benitez, additional reporting by Helene Durand, editing by Julian Baker)