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
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,"
A LOOK AHEAD
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
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
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.
DEPTH OF DEMAND
Europe has traditionally played second best to the US
market, which is known for easily absorbing multi-tranche
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
"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)