INTERNATIONAL - The $38 billion (R478 billion) financing backing the merger of T-Mobile US and Sprint Corp is the latest high-profile M&A financing to hit the market, adding to a pipeline of deals that lenders expect will continue to grow.
Lenders have extended about $679bn in loans backing global M&A deals so far this year, toppling the prior record of almost $542bn set for the same period in 2007 before the financial crisis, according to Thomson Reuters LPC data.
These numbers promise to keep swelling, with Vodafone nearing a transformational deal to buy assets from cable giant Liberty Global.
“A generally business-friendly environment in Washington, DC, a positive economic outlook and favorable tax treatment, both in terms of corporate rates and being able to access foreign reserves in a tax efficient way, appears to be giving boards the confidence they need to pull the trigger on strategic transactions, some of which have been in the works for a while,” said Jason Kyrwood, a partner at Davis Polk.
Industry-specific factors, including the so-called Amazon effect and the need for international expansion to drive growth, are also at play, he said.
“Certainly there’s no shortage of financing available,” Kyrwood said. “There are more marquee deals than we’ve seen in a while, and banks are eager to participate.”
Corporations clamoring for growth and diversity are striking while the iron is hot, with borrowing costs still low and investor demand for the debt backing many of these transactions still high.
The $1.7trn of global mergers and acquisitions announced this year, a record for this period, tops just over $1trn during the same time a year ago, according to Thomson Reuters Deals Intelligence.
Six banks initially committed $38bn of loans to back the tie-up between the third- and fourth-largest US wireless carriers.
The financing comprises a $4bn five-year revolving credit, a $7bn seven-year senior secured term loan B, a $19bn 364-day senior secured bridge loan and $8bn in senior unsecured bridge loans that will be replaced by high-yield bonds.
Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and RBC are providing the debt.
“The challenge with T-Mobile and Sprint is a very long regulatory period – 12 to 24 months of intense scrutiny,” said a senior banker.
Banks are being judicious, he said, moderating exposure to the huge deals to leave room for oncoming deals and to manage potentially long regulatory reviews that could tie up balance sheets.
“It’s not so much that banks are at capacity, but wanting to keep capacity open, because everybody sees a very strong and building pipeline for M&A and they hate to be stopped out of the next deals because they just locked up their balance sheet,” the senior banker said.
Online retailer Amazon’s unconventional mash-up with grocery chain Whole Foods Market last summer has raised the stakes for atypical mergers, especially in industries where behemoth Amazon is perceived to be a potential competitor.
“Companies are trying to come up with the next killer combination or economic coupling that will generate more profit than traditional business models,” another senior banker said.
As the push for diversification and profit heats up, technology and healthcare are among the leaders in consolidation.
CVS Health Corp on Wednesday said it still expects its $69bn deal to buy health insurer Aetna Inc, announced last December, to close during this year’s second half. That merger was followed in March by Cigna Corp’s plan to buy pharmacy benefits manager Express Scripts for $52bn.
A rising tide of cross-border deals is also contributing to the global M&A spike.
There is the £23bn loan for US cable operator Comcast’s bid for London-based Sky and a potential new jumbo loan for Japanese drug company Takeda Pharmaceutical’s US$64bn offer for London-listed rare disease specialist Shire.
Lower US corporate tax rates and ready US cash stockpiles to put to work overseas are among factors driving the push across international lines. Also, Brexit uncertainty is encouraging some Continental European and Asian firms to look at the US and UK companies to look abroad.
“Clearly we are in a boom,” the first senior banker said. “Now four months into the year, the pace may normalize, but while it may be tough to maintain this breakneck pace, I don’t think that means it will be done or fall off sharply.”