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Last updated: May 5, 2014 9:50 am
European companies are increasingly using high-yield bonds to fund acquisitions, fuelling hopes that this new source of money will help boost a long-awaited recovery in European dealmaking.
Groups in Europe have already put €15bn in new high-yield debt to work funding mergers and acquisitions this year, compared with €9.6bn for all of last year, according to Barclays Research. Companies are spending roughly one-third of junk-rated debt on M&A, up from 12 per cent last year, with the bulk of the rest used for refinancing.
The ability of debt capital markets to help fund megadeals with junk bonds was illustrated last month when Numericable, the French cable operator, and its parent group, Altice, together issued the largest ever such bond package of $16.7bn and used much of the proceeds to fund the takeover of SFR, Vivendi’s telecoms subsidiary.
Analysts said that they were surprised by the level of demand for the combination of loans and bonds with Ba3 ratings by Moody’s – deeper into junk territory. They attracted $100bn of orders from across the world. As a result of the record transaction, some bankers estimate that the high-yield bond market could now be used to finance acquisitions of up to $40bn.
“The deal is a reminder of how friendly the high-yield market is right now for companies seeking to raise large pools of capital,” said Marty Fridson, chief investment officer at LLF Advisors.
“Certainly companies and investment bankers both in the US and Europe took notice of the Numericable deal. It may encourage others.”
Analysts at Standard & Poor’s said the Numericable/Altice transaction was a “positive supporting factor for the M&A market in Europe, which has the dramatic rebound in deal flow that we’ve observed in the US since 2013”.
One factor behind the enthusiasm for using high-yield bonds in M&A is that the cost to companies of using this form of finance has plunged in the last few years. Average yields on bonds with speculative grade ratings, is now down to 4.15 per cent – having peaked at 25.3 per cent at the height of the financial crisis in 2008 and still been as high at 11.3 per cent three years ago, according to JPMorgan data.
At current levels, the cost to acquiring companies of high-yield bonds compares favourably with that of leveraged loans, which are more traditionally used for M&A.
“Over the past two years we have seen a transition from loans to bonds, and high-yield bonds are the fastest-growing sector of the market,” said Darpan Harar, an analyst with Barclays Research. “The sheer size and depth of the market means it will be increasingly used for M&A.”
Taron Wade, a credit analyst with Standard & Poor’s, said: “Much of recent high-yield bond issuance has been used for refinancing, so there is a lot investor appetite for new transactions, such as acquisitions.”
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