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US government gives M&A bond investors a wake-up call

A crackdown on big corporate mergers on tax-avoidance and antitrust concerns may not put much of a dent in the M&A bond pipeline, but it could make debt financing of such deals more difficult in the future.

[NEW YORK] A crackdown on big corporate mergers on tax-avoidance and antitrust concerns may not put much of a dent in the M&A bond pipeline, but it could make debt financing of such deals more difficult in the future.

The US$160 billion merger between Pfizer and Allergan collapsed this week after the US Treasury clamped down on tax-dodging inversion trades, while the US$35 billion tie-up between oilfield service companies Halliburton and Baker Hughes was also thrown into question after the US government sued to block the deal.

That immediately called into question whether record M&A investment-grade bond volumes - fuelled by big M&A over the past couple of years - would fall off a cliff.

For now, bankers are hoping there won't be many more victims beyond these two deals.

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And if that proves to be case, there should not be much impact on the roughly US$150 billion bond pipeline estimated by one DCM banker - which is mostly, but not all, destined for the US high-grade bond market.

Halliburton already sold bonds last year to finance its purchase, while Pfizer only had to raise some US$6-US$8 billion.

"Just because two deals have got busted doesn't mean that the forward pipeline will suddenly fall," said the debt capital markets banker.

Teva, for example, is still expected to go ahead with its purchase of Allergan's generics business - and that needs about US$22 billion in bond financing, bankers and investors said.

Still, a more aggressive stance is a cause for concern, and there's no doubt the events have set the market on edge.

"Certain types of deals might get harder - especially anything with an inversion," said the DCM banker.

Other large pending inversion trades include the merger between Tyco International and Johnson Controls.

On the antitrust side, some big M&A deals in the US health insurance sector - Aetna/Humana and Anthem/Cigna - also require sizeable bond financing and are potentially more vulnerable.

"I'm sure both think they'll be fine, but so did Baker Hughes and Halliburton," said the DCM banker.

Issuers now also have to weigh up the benefits of borrowing at cheap rates while markets are stable, and before the US Federal Reserve raises rates, with the risk that their deals are culled by the authorities.

On new M&A deals, they are also likely to be more selective about both partners and deal structure.

The government's assault on mega-mergers could also force issuers to wait a little longer before printing debt to finance acquisitions. "Issuers who are funding M&A will wait until they have more regulatory certainty before they pull the trigger on the debt financing," a debt syndicate official told IFR.

Investors, meanwhile, are also likely to be more aware of the risks going forward.

Allergan's bonds widened sharply after its deal with Pfizer fell apart - mostly because its credit ratings will stay in the low Triple B area instead of marching upwards to Pfizer's Single A ratings. That left some on the buyside feeling bruised.

If regulators sink the Halliburton/Baker Hughes deal, Halliburton will have to buy back two of the bonds it sold in November - the 2020s and 2022s - at a cash price of 101.

Those two bonds fell towards those levels on news of the Department of Justice's lawsuit - also leaving some on the buyside with losses.

That may make buyers call for better covenants going forward. "Investors will want some protection around the buyback price," said Lon Erickson, managing director at Thornburg Investment Management.

"They may want something greater than 101, or some reflection of where the bonds were trading before the break-up occurred."

Even so, the mains reasons for doing M&A - such as cheap financing and an economy that is still growing - are still there, the DCM banker said.

"Certain types of deals might get harder but as far as regular-way M&A goes, we're still likely to see healthy activity," he said.

The immediate pipeline of announced M&A that may need bond financing still stands at US$486 billion in terms of aggregate enterprise value, across 32 deals, according to Bank of America Merrill Lynch credit strategists.

Some people believe it will continue to grow.

"Risk appetite has rebounded but investors are showing more discretion," said CreditSights analysts.

"We see a market of haves and have-nots when it comes to assessing financing for acquisitions. For those that have it - in terms of investor appeal - the amount of money that can be raised in a virtual blink of an eye remains substantial and so we believe that M&A volumes should head higher from 1Q16."



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