Goldman Says High-Grade Credit Can Absorb Surprise 2018 M&A Rush
(Bloomberg) -- Investment-grade credit can absorb the flood of mergers and acquisitions that have begun 2018, according to Goldman Sachs Group Inc.
The acceleration of M&A activity in the first quarter was fueled by clarity on tax reform late last year, the firm said. The health care, technology/media/telecom and energy sectors have played a large role, making up more than half all deal activity.
“The takeaway for the broader IG market is that M&A risk should be well-digested by spreads, especially given the recent widening,” Global Credit Strategist Amanda Lynam wrote in a note Monday. “That said, we do expect M&A to be a driver of dispersion across sectors, which is reflected in our sector views: we are underweight IG Healthcare and neutral on IG Energy.”
In pharmaceuticals and technology, the overseas net cash balances of cash-rich U.S. multinational firms will likely be depleted over time, including to fund M&A, the note said. IG Energy has less attractive valuations and worsening leverage metrics, but also a supportive commodity backdrop and lower event risk.
“The depth and diversity of the IG investor base will provide a meaningful offset to any potential contraction in corporate demand for short-dated bonds,” Lynam wrote. “With none of the cash-rich companies issuing bonds year to date, the upcoming earnings season should provide more details on managements’ plans.”
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