NEW YORK, March 14 (IFR) - Merger and acquisition activity
is finally heating up in the US, with a flurry of leveraged
deals announced or rumoured in the past fortnight, but so far it
is loans, not bonds, that are the biggest beneficiaries.
TPG and CVC are competing to acquire Denver-based Gates
Global, in a deal expected to value the auto parts maker at
US$5bn-$6bn, while Charterhouse is also nearing a deal to
acquire Skillsoft for more than US$2bn, according to Reuters.
Men's Wearhouse clinched the table-turning US$1.8bn
acquisition of its former suitor, Jos A. Bank, and Cerberus
announced it was purchasing grocery operator Safeway in a deal
involving about US$7.6bn of debt financing.
But although the Cerberus financing includes a bridge to
bond, it is likely that the majority will be financed in the
The bulk of Men's Wearhouse's US$2.2bn of debt acquisition
financing will also be in loans.
"There is a healthy appetite in the loan market that has led
to an increase in second-lien activity, which has certainly
displaced some products from high-yield more recently," said
Kevin Sterling, head of leveraged finance syndicate at Goldman
M&A-related high-yield bond issuance - including corporate
strategic purchases, LBOs, sponsor-purchases of asset
carve-outs, acquisitions of minority interests, and
sponsor-to-sponsor sales - has increased this year, but not as
much in dollar terms as the amount raised in the leveraged loan
According to Bank of America Merrill Lynch's own internal
data, M&A-related high-yield bond issuance in the US jumped to
US$9.8bn in the first two months of this year from US$3.48bn the
same period a year earlier, while M&A-related leverage loan
issuance has soared to US$17.8bn from US$9.7bn.
Bankers hope M&A-related financing will help offset a plunge
in refinancing mandates in high-yield bonds this year, now that
just about everything that could be refinanced has been.
But despite the rise in M&A-related business, US high-yield
bond volume is still down so far this year at US$57.2bn year
to-date from US$67.5bn in the same period of 2013, according to
Thomson Reuters data.
Insatiable demand for floating-rate product in a rising
rates environment has helped drive in pricing on leverage loans
- both first- and second-lien.
"The second-lien market has definitely taken share from the
high-yield bond market when it comes to M&A financing," said a
leveraged finance principal at a major private equity firm.
"We have seen second-lien loans that were large enough to
get done in the high-yield bond market, but borrowers much
prefer the covenant-lite characteristics in loans, and bonds
always have more onerous call protection."
High-yield bonds are not missing out altogether. The larger
the M&A transaction, the greater the amount that gets
apportioned to bonds, as borrowers seek to diversify their
investor base and lock in fixed-rate longer-duration financing.
On Friday, the US$1bn bond financing Starr & Partners'
acquisition of healthcare cost management provider Multiplan was
announced, while US$850m of bonds are planned to part-fund
Carlyle's acquisition of Illinois Tool Works's industrial
But both have far bigger loan components.
The roughly US$1.9bn of debt expected to back the
acquisition of AT&T's Connecticut wireline operations by
regional telephone operator Frontier Communications could be one
of the rare situations where the whole lot is done in bonds.
CORPORATES MUSCLE IN
The number of acquisition-related high-yield bond deals
could depend on whether there will be more jumbo leveraged M&A
deals this year.
So far none of the high-yield M&A deals have been above
US$10bn in size, and few believe the pre-crisis days of mega-LBO
deals will return.
"The markets can easily handle larger acquisitions and LBOs,
but I don't think we will see the mega deals becoming
commonplace again," said Bill Sanders, head of Morgan Stanley's
investment banking group covering sponsors.
"On the whole, the consortia required and the amount of
leverage taken on for those deals is not what sponsors want to
Bigger M&A deals are more likely to come from corporates
"While share buybacks and dividend payments have been useful
deployments of capital, company boards and shareholders are
increasingly seeing that acquisitions are the best way to bump
up the share price and turbo-charge returns," said Peter Tague,
co-head of global M&A at Citigroup.
"There is material outperformance of companies that are the
acquirers. They are being rewarded in the current equity
marketplace in a way that is almost unprecedented."
This story appears in the March 15 issue of IFR Magazine, a
Thomson Reuters publication