Guggenheim, MetLife Caution on Debt for Firms Seeking M&A

(Bloomberg) -- A couple of major investors are growing concerned about the trend of companies leveraging up for big deals.

MetLife Inc. Chief Investment Officer Steve Goulart and Guggenheim Partners CIO Scott Minerd both said in interviews at the Milken Institute Global Conference this week that they’re worried about firms borrowing aggressively for mergers and acquisitions.

“We probably are avoiding more than not companies that actively are involved in M&A, that have increased their leverage dramatically,” Goulart, who oversees almost $600 billion for the insurer as well as outside investors, told Bloomberg Television at the conference in Beverly Hills, California. “Also in the bank loan space, when we see terms and conditions continue to fall away and capital structures that are much more risky, we are staying away from those too.”

Minerd said ratings companies are giving free passes to companies that are pursuing deals based on promised synergies in the takeovers. But Guggenheim’s math shows that many firms will struggle to service their debt payments or will have shrinking revenue over the next couple of years, which will also make it harder for them to pay back debt.

"It is ultimately going to come back and haunt rating agencies," he said in an interview at the Milken conference.

Goulart said he’s concerned more broadly about BBB-rated securities with a lot more leverage today than in past years. If those get downgraded during a recession, Goulart said, his company is subject to higher capital charges. Insurers are among the largest buyers of debt.

Issuance of collateralized loan obligations had a record year in 2018, and that’s made bank loans riskier as well, Goulart said. Minerd said many firms have been naïve about buying CLO debt, just because the industry was relatively unscathed during the financial crisis.

“The CLO market has grown dramatically, and that’s increased the demand for the underlying bank loans that provide the assets for CLOs,” Goulart said. “We’ve seen structures that have terms and conditions that are not as strict as they used to be.”

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