July 20, 2018 / 3:29 PM / in 2 months

Banks, downplaying recession, foresee record U.S. M&A lending

NEW YORK (LPC) - Bank lending for US mergers and acquisitions of high-grade companies will scale new heights this year, as the voracious appetite for mega-deals persists even while credit markets turn choppy and recession talk surfaces, bankers and strategists said.

M&A lending to US blue chip companies could top $250 billion by year end, according to Thomson Reuters LPC’s quarterly lending survey, in what would be a record, far surpassing the prior high of around US$203bn last year.

This year has already seen three of the 10 largest US investment grade bridge loans of all time – extended to Walt Disney for Fox, US cable company Comcast’s ongoing bid for European broadcaster Sky, and health insurer Cigna for pharmacy benefits manager Express Scripts.

Banks’ liquidity and capacity to lend is plentiful, particularly after Comcast withdrew its record all-cash US$66bn bid for Twenty-First Century Fox media assets on Thursday and Broadcom’s $117 billion takeover of Qualcomm was blocked by President Trump in March.

Broadcom had lined up as much as US$100bn in bank financing that fell away when the deal came undone. Comcast had secured “highly confident” letters from banks, which indicated the lead arrangers were confident they could put together financing while the bidding war with Disney for Fox media assets heated up.

Chipmaker Broadcom is now back in the market with a much smaller $18 billion term loan funding its planned purchase of business software company CA Inc.

A wide range of companies, including media conglomerate Disney and packaged food company Conagra Brands, are currently in the market with large M&A financings. Disney has a bridge loan for up to $35.7 billion and Conagra this week announced a US$1.3bn term loan that reduced the commitments under its US$9bn 364-day bridge loan, all of which the loan and bond markets are expected to absorb easily despite the volatility.

“You hear chatter around the peak of the credit cycle, but it doesn’t seem to have impacted bank lending appetite on the investment-grade side,” said Robert Kilcullen, a managing director in MUFG’s corporate advisory group.

“The capital markets have gotten a little choppier, but it doesn’t feel like, particularly on the investment-grade side, that anyone is getting shut out or there is any sector that no one will touch.”

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The M&A deal machine revved up after a federal judge, in a highly anticipated ruling, in June gave the go-ahead to the long-pursued merger between AT&T and Time Warner.  This month, the Department of Justice appealed the ruling, giving lenders a pause although most expect the tie-up to be upheld and see more mega-mergers ahead.

Bankers said there is appetite to lend as much as $100 billion to $125 billion in a single bridge financing, if such a large deal were to crop up again. A dozen banks provided the $100 billion bridge loan for the Broadcom/Qualcomm deal, which ultimately fell through.

There is also confidence that big borrowers of short-term bridge loans will readily be able to access the bond markets when replacing the loans with permanent financing, despite turbulence in recent months. 

“High-grade companies won’t have problems going to market,” said one senior banker. “Banks are still hungry for assets. I don’t see a pullback from lending happening in the near future.”

If market volatility escalates, and M&A-related bond supply puts pressure on yield spreads and pushes borrowing costs higher, that optimism could fade.

For now, “both high grade and high yield credit investors show so little concern about fundamentals - or so-called ‘lower quality trends’ - that it almost appears as if we are in the early recovery stage after a recession,” a Bank of America Merrill Lynch Global Research report said.

REWARDS

Banks are reaping profits from the bountiful M&A lending and are expected to continue to do so throughout the year.

Fees earned from arranging loans to high-quality companies reached $1.5 billion in the first half of the year, a 44 percent jump from a year earlier and the highest half-year total on record, according to Freeman Consulting Services, which bases its estimates on Thomson Reuters data.

“Banks are willing to sit on larger commitments – there are big checks on the table,” the senior banker said.

The M&A loan bonanza, fueled by President Trump’s tax cuts and improving economy, is financing transformational deals as whole industries reshape to adapt to threats from online retailers and grapple with technological change.   

“The strength of the M&A market is really reflected in the types of deals we’re seeing lately –  including Amazon buying PillPack to move into pharma distribution,” said Jeff Nassof, a director at Freeman Consulting. “These are late stage transformational deals that we see when things are really optimistic.”

Online retailer Amazon triggered a wave of match-ups last year as it continued to put companies’ traditional business models under pressure. Its merger with Whole Foods Market, announced in June 2017, shook up the supply chain industry and put pressure on grocery markets.

Reporting by Lynn Adler; Editing by Tessa Walsh and Michelle Sierra

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