LONDON/NEW YORK Banks are more willing to lend for big takeovers by companies such as BHP Billiton Ltd (BLT.L), Sanofi-Aventis SA (SASY.PA) and CVC Capital Partners CVC.UL, and with borrowing cheap, would-be buyers are seizing the chance.
This means that sensible deals that were ruled out because financing was too scarce or costly may now return to the agenda, even if they run into the tens of billions of dollars.
"For good credits with strong relationships, $30 billion-plus size deals are quite possible," said Ray Doody, head of acquisition and leveraged finance for Europe, the Middle East and Africa (EMEA) at JPMorgan.
Preliminary Thomson Reuters data released on Friday showed global mergers and acquisitions (M&A) up 21.2 percent this year to $1.68 trillion. The quarter is the largest by value in the two years since Lehman Brothers collapsed.
JPMorgan Chase and Co (JPM.N), the year's second-busiest arranger of loans, is one of five underwriters for the $45 billion of loans supporting BHP Billiton's bid for Potash Corporation of Saskatchewan Inc (POT.TO).
The Anglo-Australian miner, led by Marius Kloppers, is paying premiums over benchmark lending rates that are roughly half those paid by the similarly credit-worthy RWE AG (RWEG.DE) when the German utility took out a 9 billion euro ($11.96 billion) loan to buy Dutch peer Essent NV ESSNT.UL last year.
That matches a wider rally. Thomson Reuters Loan Pricing Corp data show borrowers with solid A credit ratings paid about 71.7 basis points over interbank rates this quarter, against 143.3 bps a year ago.
In the year to September 10, borrowers agreed syndicated loans worth $1.25 trillion, while riskier "leveraged" loan volume rose 51 percent to $383 billion, LPC data show.
Bankers say one explanation is that recapitalized banks competing harder to win lending business and the lucrative follow-on work it often produces.
Paul Staples, London-based head of corporate finance at BNP Paribas SA (BNPP.PA), this year's busiest bank for EMEA loans, said acquisition finance had grown "progressively more accessible" in 2010.
"Corporate clients have shown a keener appetite to pursue more ambitious deals and banks have become more competitive in their desire to support them," he said.
Leaner premiums to borrow are only part of the picture.
Low official interest rates and the huge sums injected into the financial system to stave off disaster, mean the benchmark rates over which deals are priced are also rock-bottom, leading to very low all-in borrowing costs.
The dollar LIBOR rate, for example, shows banks are lending each other dollars for three months at less than 0.3 percent.
French drugmaker Sanofi is one company benefiting from what Chief Executive Chris Viehbacher terms "cheap debt" -- provided in this case by BNP, JPMorgan and Societe Generale (SOGN.PA) to back his $18.5 billion approach to Genzyme Corp GENZ.O, the U.S. rare-disease specialist.
"The fact that big corporations today can borrow money pretty cheaply means that a lot of deals that wouldn't have been accretive in the past actually are now suddenly accretive," to earnings, he recently told investors in London.
Conditions are also easing in the "leveraged" market for riskier deals -- those that lack investment-grade ratings and often stem from private equity buyouts.
That has been aided by a rally in the market for high-yield, or "junk," bonds.
This year has already seen a record amount of new issues, approaching $200 billion, and Merrill Lynch's global high-yield index .MERHW00X shows investors have enjoyed annual returns above 20 percent.
That rally leaves would-be buyers less reliant on banks, which remain cautious about committing big amounts, sometimes for years, to riskier borrowers.
When CVC spent 3.3 billion francs ($3.3 billion) last week to buy Sunrise, a Swiss telephone company, the deal was backed by 2.545 billion francs of debt, and unusually for such a deal, more than 60 percent of that was bond financing.
On both sides of the Atlantic, banks and private equity funds are eyeing deals that could top $5 billion.
TPG Capital LP TPG.UL and Silver Lake Partners SILAK.UL recently talked about buying Seagate Technology Plc (STX.O), a $5 billion hard-drive maker, a source familiar with the situation said, although the talks faltered over valuation.
Europe could soon accommodate a deal worth more than 5 billion euros, allowing for a big equity investment.
"For a new leveraged buyout in Europe, with the right type of assets, you could raise 3 to 4 billion euros of debt," said Doody at JPMorgan. "As deal size increases, the proportion coming from the bond market -- rather than the loan market -- will increase."
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