M&A Spree Piles Debt on Europe Inc. at Fastest Pace Since 2018

M&A is back on the menu for Europe Inc. and that’s bad news for bondholders.

The region’s corporates have emerged from the pandemic in a spending mood -- ready to dole out cash on buyouts, dividends, buybacks -- all in the name of winning over shareholders, even if that means imposing pain on lenders.

They’ve borrowed to fund acquisitions at the fastest quarterly pace since 2018, with $22 billion raised in the months since April 1, according to data compiled by Bloomberg. It’s a development mirrored in the biggest global deal-making spree in decades.

M&A Spree Piles Debt on Europe Inc. at Fastest Pace Since 2018

While shareholders are cheering the trend, bondholders are wary of firms’ using debt to snap up rivals or pay dividends that often pushes up leverage and undermines creditworthiness.

“Credit investors should be on the lookout for greater event risk in Spanish and U.K. firms, as well as industrials,” Bank of America strategists led by Barnaby Martin wrote in a June 18 note.

Takeover Target

Investors in the bonds of Wm Morrison Supermarkets Plc got a taste of event risk this week when a potential bidding war was triggered by Clayton Dubilier & Rice LLC’s 5.5 billion-pound ($7.7 billion) bid. Even though that approach was rejected, the price of Morrison bonds tumbled by the most since they were sold in 2014 as the grocery store chain turned into a takeover target overnight.

It may be just the start. Private-equity firms are stocked with record amounts of uninvested capital, and are on the hunt for deals among healthcare, technology and industrial firms. The last big M&A wave in 2018 caused the ratings of Denmark’s TDC A/S and British aerospace and defense contractor GKN Holdings to slide to junk after buyouts.

The threat is on the radar for Andrew Jackson, head of fixed income at Federated Hermes International. After spending the last few years slashing leverage, companies are more apt to please shareholders than make more concessions to bondholders, he said.

“As companies reach balance-sheet objectives there is also potential for a further increase in non-credit-friendly behavior and we note an increase in M&A volume,” Jackson wrote in a note to clients.

Investors can find little solace in clauses designed to protect them from losses from ratings-damaging buyouts. Change-of-control put options are triggered at par, allowing investors to exit positions at face value. The trouble is, with so much of the market trading above this level, the puts often bring their own losses.

Read more: Credit Rally Leaves Investors With Toothless Protective Clauses

Europe

Sixteen deals are active in the primary bond market on Wednesday with at least EU9.35b expected to price.

  • Financier Gerard Lopez has reached a deal to rescue FC Girondins de Bordeaux, a top European soccer club, from going bust
  • Investors swarmed into Slovenia’s debut sustainability bond, showing the growing appetite for diversity in ethical bond issuance

Asia

Three Asian issuers are offering dollar notes on Wednesday, while two other companies have mandated banks for future ESG-related bond sales. Premiums of the region’s investment-grade debt securities stayed near the tightest level since early April.

  • Spreads for the region’s high-grade U.S. currency notes were little changed on Wednesday. Average premiums of Asia’s investment-grade bonds widened on Tuesday after eight consecutive days of tightening, according to the Bloomberg Barclays Index
  • A unit of China Huarong Asset Management Co. has transferred funds to repay a $250 million bond maturing Wednesday, according to a statement from the company.
  • The rating of China Evergrande Group, Asia’s biggest issuer of dollar-denominated junk bonds, was downgraded further by Fitch Ratings, which lowered the company’s assessment by one notch to ‘B’

U.S.

Junk bond sales have fired up again as the debt rebounded from recent weakness stoked by concerns of rate hikes.

  • Debt tied to Sinclair Broadcast Group Inc.’s sports unit sold off after the company disclosed a failed attempt to raise new capital and rework its balance sheet with existing creditors
  • For deal updates, click here for the New Issue Monitor
  • For more, click here for the Credit Daybook Americas

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