May 18, 2017 / 8:28 PM / in 9 months

LPC: U.S. merger lending bounces even as Trump agenda stalls

NEW YORK (Reuters) - Mergers and takeovers by U.S. high-grade companies and billions of dollars of acquisition loans are ramping up after a sparse first quarter as corporations unwilling to wait for the Trump administration’s delayed tax, trade or healthcare reforms push the button on new deals.

Roughly US$30bn of investment-grade loans have been mandated so far in the second quarter financing mergers and acquisitions (M&A), which already exceeds the US$18bn arranged in the first three months of the year, according to Thomson Reuters LPC data.

With six weeks remaining in the second quarter, M&A lending is climbing, although it is still below the US$54bn seen in the second quarter of last year.  

“If a company has something in its laser sights, and if it can’t grow organically, it’s not going to let all of the uncertainty about tax and other policies get in the way of what they need to do strategically to meet their goals,” a senior banker said.

As investment-grade strategic marriages heated up starting in the healthcare sector in April, US medical supplier Becton Dickinson said it would by C R Bard for US$24bn, the latest in a string of medical technology mergers by device makers looking to bolster profits. The deal was supported by a US$4.5bn loan facility.

Drug distribution company Cardinal Health had a bridge loan of the same amount to support its US$6.1bn purchase of Medtronic Plc’s medical supplies units.

Robust investor appetite for debt, and a generally pro-business climate, are also spurring a gradual flow of deals among lower-rated companies, which borrow in the leveraged loan market. M&A lending in the leveraged space of US$41bn in the second quarter to date looks to surpass US$51bn in the first quarter, which was the lowest quarterly tally in four years.

Market strategists increasingly view highly-anticipated policy actions as more likely to occur further down the road than promised by the Trump campaign.

“There’s so much pent up demand, cash and CEO confidence,” another banker said, which is leading companies to decide “let’s get on with it.”


Some higher-rated investment-grade companies are also dipping into the lower credit quality pool and buying junk-rated competitors as a way to shave costs and expand product offerings.

In the second quarter, investment-grade corporations in the retail and biopharmaceutical and food sectors announced acquisitions of lower-rated companies that complement their businesses to boost profits.

Coach Inc is purchasing smaller luxury handbag rival Kate Spade & Co, backed by up to US$2.1bn in bank loans. Scientific instrument maker Thermo Fisher is buying drug maker Patheon NV, supported by a bridge loan for about US$7.3bn, bankers said.

Tyson Foods is buying packaged sandwich supplier AdvancePierre for US$4.2bn including debt, as a way to grow its prepared foods business, entering the agreement with US$4.5bn of commitments under a 364-day bridge loan.

“In certain industries, now’s a great time for investment-grade players to scoop up sub-investment grade companies,” said Sean Coleman, chief credit officer for FS Investments. “They can take advantage of very low cost debt to achieve greater scale, cut costs and expand their product portfolios.”

Thermo Fisher said it expects to realize about US$120m of total synergies by year three following the deal’s close. Bankers are expecting more of these types of strategic tie-ups as the year unfolds.

Still, the steady drumbeat of US political drama unrelated to tax, trade or healthcare overhauls could keep delaying policy changes, compelling some merger candidates to stay on the sidelines closely monitoring developments, several bankers said.

Unrelenting news out of Washington, including the “buzz of impeachment”, threatens to drown out the Trump legislative agenda, according to Keefe, Bruyette & Woods analysts. Cooperation between the White House and congressional Democrats was already low, they wrote in a note, while fear and a strong sense of self-preservation will make it harder for some Republicans to support Trump’s policy proposals.

“To the extent that the post-election rally has been supported by a belief in the Trump agenda, we think the markets’ attitude regarding the Trump agenda is misplaced,” the analysts wrote. “We think the Trump legislative agenda is in mortal danger.”

Reporting by Lynn Adler; Editing By Tessa Walsh

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