November 1, 2018 / 11:44 PM / 4 months ago

IBM a top bridge loan borrower with Red Hat buy

NEW YORK (LPC) - IBM Corp’s $20 billion loan supporting the information technology company’s purchase of US software company Red Hat Inc is one of the largest ever bridge loans for a US investment grade company and banks are keen to lend after several quiet months for big mergers and acquisitions. 

FILE PHOTO: The logo for IBM is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 27, 2018. REUTERS/Brendan McDermid/File Photo

JP Morgan and Goldman Sachs are providing the 364-day bridge loan for IBM’s $34 billion takeover, which includes debt. The deal is the company’s largest strategic acquisition and is designed to bolster its cloud business and increase profit margins.

IBM’s bridge loan just sneaks into the top 10 biggest US bridge loans ever arranged, a position that it shares with the $20 billion facility that backed AT&T’s purchase of T-Mobile USA in 2011, according to LPC data. At the time, that was the biggest sole underwriting by a bank by arranger JP Morgan.

Banks have been waiting for more acquisition loans, particularly in the technology space, after a record $100 billion loan package that was put in place in February for chipmaker Broadcom Corp’s takeover of rival Qualcomm was scuttled by national security concerns in March.  

That deal, which would have been the biggest loan ever globally if it had cleared regulatory hurdles, revealed deep loan market liquidity for tech borrowers, which is still on the table.

“Pent up demand is definitely at play,” said one senior banker. “We’ve had a light amount of new-money activity of late.”

IBM’s deal reflects a growing pace of consolidation in the technology space this year, as companies build scale and product diversity to stay competitive.

US technology M&A, at about $279 billion so far this year, is already more than three times the deal value seen in the same period last year, according to Deals Intelligence.

MIXED M&A YEAR

About $86 billion of US investment-grade bridge loans were issued in the first half of 2018, before plunging to less than $2 billion in the third quarter, LPC data shows. Fears about trade wars, US mid-term elections, and rising interest rates boosted stock and debt market volatility and put the brakes on deal making.  

Despite broader capital markets volatility, loan bankers are still keen to lend to highly rated companies that are seeking to buy growth by acquisition. Companies are cash rich because of lower US corporate tax rates as well as cheaper access to overseas money due to US tax reform.

“You’re probably not going to see anything but deep support for an A1/A rated tech name making an acquisition that keeps them focused on what they do and broadening their appeal within the cloud/software space,” the senior banker said.  

IBM’s senior unsecured debt is rated A1 by Moody’s Investors Service, and is on review for a one-notch downgrade based on the additional debt for the Red Hat purchase. A one-notch downgrade would put the rating on par with S&P’s rating, which was cut on October 29 to A from A+, based on rising acquisition-related leverage.

Moody’s estimates IBM’s pro-forma gross adjusted debt to Ebitda at 1.7 times as of September 30, and S&P estimates 1.0 times currently.

The merger is “a game changer,” and the combination with Red Hat “is about resetting the cloud landscape,” IBM Chief Executive Ginni Rometty said on an investor conference call.

FEE EVENT

The IBM/Red Hat merger will earn total fees of about $37.4 million for banks arranging the $20 billion bridge loan, and a total between $84 million-$96 million of advisory fees, according to preliminary estimates from Deals Intelligence.

After the third-quarter slump in investment-grade M&A, bankers have been waiting for lucrative new lending opportunities.

“Especially on the heels of the Qualcomm/Broadcom deal coming undone, and seeing a lot of other mega deals being done earlier in 2018, it proves that banks are still very supportive of M&A transactions,” another senior banker said.

The largest ever US bridge loan for a blue chip company is still the $61 billion facility arranged in 2013 for Verizon Communications Inc’s buyout of Vodafone Group’s stake in Verizon’s US wireless business. That loan far surpasses the second-biggest bridge loan, a $49 billion facility, which was put in place in 2017 to back pharmacy chain CVS Health Corp’s acquisition of health insurer Aetna Inc.

Other huge US bridge loans in 2018 that also make the top 10 include a $35.7 billion facility for Walt Disney Co that financed the cash portion of its bid to buy Twenty-First Century Fox media assets, which is the fourth-largest bridge on record; and a $23.7 billion bridge backing Cigna Corp’s acquisition of pharmacy benefits manager Express Scripts Holding Co, which is the sixth-largest deal ever.

Reporting by Lynn Adler; Editing by Tessa Walsh and Michelle Sierra

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