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M&A debt needs pile up as bond-market pause belies coming deluge
[NEW YORK] The backlog of companies that need to tap the US bond market is growing as borrowers wait for turmoil to blow over from Greece and China's stock-market slump.
A record pace of takeovers announced this year heralds a potential deluge of issuance that Bank of America Corp analysts predict will make July and August the busiest ever for sales of corporate securities. CVS Health Corp. has arranged US$13 billion in financing to buy Omnicare Inc. Halliburton Co. has lined up US$8.6 billion to buy Baker Hughes Inc. Charter Communications Inc is said to be marketing debt to fund its acquisition of Time Warner Cable Inc in what may be the biggest junk-bond sale of the year.
"There is a lot of M&A financing in the pipeline waiting for the uncertainty to lift," said Raman Srivastava, the head of global fixed income at Boston-based Standish Mellon Asset Management Co, which manages US$170 billion. "Even with all the turmoil the world doesn't stop, and neither does the need for financing." Companies have been racing to issue debt and lock in cheap borrowing costs before the Federal Reserve raises interest rates for the first time in nine years. More than US$110 billion of bonds backing takeovers have already been sold in 2015, on top of a record US$165 billion last year, according to data compiled by Bloomberg.
Greece, China Issuance plunged by almost 40 per cent to US$123 billion last month as Greece's debt crisis escalated and concern mounted that China's plunging stock market will ripple across the globe, Bloomberg data show.
While the uncertainty has caused a slump in sales, it's also sent investors toward the safest securities.
Yields on 10-year Treasuries, a benchmark for everything from corporate debt to mortgages, fell to 2.17 per cent on Wednesday, the lowest level in more than a month. And futures show traders are pushing out expectations for a Fed rate increase to the end of the year.
"The risk of the Fed doing nothing increases," said Kevin Giddis, the Memphis, Tennessee-based executive vice president and head of fixed-income capital markets at Raymond James & Associates Inc.
"This is exactly the global risk they mentioned they were watching and it appears to be playing out in Technicolor, right in front of their eyes." While yields on US corporate bonds have risen this year to as much as 4.1 per cent on July 1 from 3.6 per cent in April, they are still lower than the 5.5 per cent average over the past 10 years, according to Bank of America Merrill Lynch Indexes.
Some investors think recent volatility that has curbed debt sales will persist.
"The market is wrestling with uncertainty, and it's hard to foresee strong issuance in the face of bad news from Greece and even worse prospects emerging from China," according to Sam Diedrich, a money manager at Pacific Alternative Asset Management Co, which oversees more than US$9 billion. "The sentiment and fear of contagion has really increased volatility, and that overhang continues."
That isn't stopping borrowers from coming to the market. Charter has begun marketing bonds, which partially funds its US$55 billion takeover of Time Warner, according to two people with knowledge of the discussions.
CVS, which is buying nursing-home pharmacy Omnicare Inc. in a deal valued at US$12.7 billion, has a US$13 billion bridge financing commitment from Barclays Plc and Deutsche Bank AG to back the takeover. Bridge loans are typically replaced by longer-term borrowings.
American companies were targets in US$438.4 billion of acquisitions in the second quarter, the most since 2007, bringing the year's M&A activity to an unprecedented US$1 trillion in the US, Bloomberg data show.
"If you step back and look at absolute levels of interest rates they are still attractive," Mark Bamford, the New York- based head of global fixed-income syndicate at Barclays Plc, said in a telephone interview. This presents "very attractive financing opportunities for companies."