* Euro corporate bond market gears up for bumper H2
* More hybrid deals expected
* M&A borrowers face leverage risks
By Laura Benitez
August 8 (IFR) - The European corporate bond market is
expected to reload early after the summer break and is gearing
up for a bumper second half of the year as issuers keen to
refinance M&A bridge loans prepare to tap the market.
Debt capital markets bankers have been hoping for some time
for a pick-up in M&A activity to bolster primary bond market
volumes and it looks as if their hopes are finally coming true
According to Thomson Reuters data, year-to-date global M&A
activity totals US$2.2trn, up 66% from the same period last
year, while July's total of US$428.5bn is the highest monthly
level since 2007.
"We're going to see more activity in the European investment
bond market coming from the increase in M&A financing; it's
definitely shaping up to be a busy September," said a syndicate
banker, who added that the market had plenty of capacity to
absorb extra supply.
A head of syndicate echoed this view, adding that he was
working on eight upcoming M&A-related bond issues. There is
currently 63.2bn worth of European bridge loans due to mature
before the end of 2015, while European leveraged syndicated
volume year to date stands at 85.5bn, according to Thomson
Increased M&A activity partly stems from the wave of
so-called tax inversion driven deals that have flooded the M&A
market over recent months. Companies have been eagerly
approaching targets ahead of new US tax rules that are expected
to come into play on January 1 2015.
The rules will restrict companies from inverting: a method
where businesses are restructured abroad to adopt new tax
jurisdictions for 20% of the combined entity's stock.
"It makes sense for those US companies that have global
operations and a mid-level investment grade and European
profile, and those with chunky funding size requirements to
target European investors. Some of these deals will be as large
as US$20bn, while others are much smaller at US$5bn," the head
of syndicate said.
The European corporate bond market has so far coped well
with an increase in supply and volumes year to date are ahead of
last year's, at more than 169.8bn-equivalent compared to the
140.1bn according to Thomson Reuters data.
Corporates are expected to use every available tool in the
treasurer's tool box, with hybrids making up an important part
of the financing mix, according to market participants.
Already, the volume of hybrid bonds issued so far this year
totals more than 27bn-equivalent, compared to 25.4bn-
equivalent in the same period last year, according to Thomson
One syndicate banker said the corporate bond market is
undergoing a change in dynamic, in which subordinated and hybrid
deals are becoming a standardised product with more
intraday-executed transactions being seen.
"It's changed the landscape for hybrid deals. We'll be
seeing low-beta names issuing these deals in the near future,
and they will attract investors chasing bigger yields and more
flexible tenors and ratings," he said.
Meanwhile, dual-tranche deals, especially from the bigger
names that have been spurred on by increased risk appetite, are
However, while the market appears to be firing on all
cylinders, the increase in M&A is not without risks.
"While the overall leverage ratios remain in check, the size
of deals and consequent aggregate borrowing has been increasing,
and this is a trend that we expect to see continue," said
analysts at Henderson.
"Borrowers are also being more innovative in how they use
debt to fund deals, with the use of term loans to pre-finance
smaller deals entirely rather than requiring costly bridge
loans, while on larger deals we see far more use of bond deals
with tranches across multiple currencies."
In a note published at the end of July, S&P warned that
while acquisitions in this cycle had been generally supportive
for credit quality, rising leverage levels could change this
feature of the M&A rebound in Europe.
Meanwhile, a number of corporates have either already been
downgraded or put on negative outlook. Fitch downgraded Vodafone
to BBB+ from A- in early August, citing the increase in leverage
resulting from the acquisition of 100% of the share capital of
GlaxoSmithKline is another example of a corporate being hit
by a downgrade because of M&A. The issuer's A1 Moody's rating
was moved to A2 in early August, partly because of the "material
contingent liability arising from a put option granted to
Novartis as part of a three-leg M&A transaction signed earlier
this year," the agency said in a statement.
British Sky Broadcasting Group's BBB+ Fitch rating could be
cut by two notches if its acquisition of 100% of Sky Italia and
a 57.4% stake in Sky Deutschland from 21st Century Fox goes
(Reporting By Laura Benitez, Editing by Helene Durand and