(Bloomberg) — Demand for corporate bonds has grown so much that investors are again willing to finance large mergers and acquisitions — something they hesitated to do for much of last year.
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In the last two weeks alone, around $50 billion worth of bonds were sold to finance acquisitions and spinoffs. The deluge, which also included bonds related to AbbVie Inc., Bristol Myers Squibb Co. and Cisco Systems Inc., marks a steep rise in M&A financing after the weakest year for dealmaking in a decade.
For Vanguard Group's Arvind Narayanan, there's more. Corporate bond markets have become increasingly busier as investors look for new, attractive-yielding debt before policymakers can cut rates. That encourages finance chiefs to raise capital while conditions are ideal.
“We expect mergers and acquisitions to continue,” Narayanan, the firm’s co-head of investment-grade credit, said in a telephone interview. It will be “front and center.”
At least $276 billion in pending M&A activity in the U.S. investment-grade bond market is expected to be funded this year, according to data compiled by Bloomberg. Broadcom Inc.'s acquisition of VMware Inc. is among deals that could lead to more issuance this year.
Buyout activity is also spreading to other markets, from European debt to U.S. leveraged loans. Not only are many of these offerings seeing strong demand from asset managers, but borrowing costs – although still elevated compared to a few years ago – have been trending downward since October.
The average spread for high-grade bonds traded at its lowest level since November 2021 last week as investors bet on monetary easing by the Federal Reserve later this year.
The story goes on
Another $35 billion in blue-chip debt is expected next week – and at least one more jumbo deal could be possible before the end of the month, say people familiar with the matter who spoke on condition of anonymity when negotiating deals wanted to.
“The opportunity to lock in historically low spreads and attract more yield-focused investors – all while the economy says we're doing well – is a perfect storm to force borrowers to step in and fix the situation “,” said Meghan Graper, global co-head of debt capital markets at Barclays Plc, in a telephone interview.
It's hard for finance chiefs to ignore the success of recent deals as bond buyers – from pension funds to retailers – look to capitalize on current high total returns. AbbVie raised more than $80 billion in orders from investors, while the Bristol Myers deal raised more than $85 billion.
WATCH: AbbVie sees more than $80 billion in demand for bond sales
High demand allows companies to sell bonds at similar yields to their existing debt. Borrowers in the U.S. prime bond market paid an average of 0.4 basis points more in yield for new bonds than their outstanding bonds on Thursday.
To convince investors to sell their current holdings and buy newer bonds, companies typically have to pay significantly more: These so-called concessions averaged 8.5 basis points throughout 2023 and 13 basis points the year before.
Increasing activity
According to Bloomberg data, Europe has seen around $72.5 billion in M&A deals so far this year, up 77% from the same period last year.
Even US companies collect money there. Boston Scientific Corp. sold 2 billion euros to finance the acquisition of Axonics Inc. The deal drew demand of more than 5.7 billion euros in pricing, according to people familiar with the matter who spoke on condition of anonymity to discuss private details. Analysts at CreditSights now expect BAE Systems to tap markets to refinance its $4 billion bridge loan for its Ball Aerospace acquisition.
Even in the junk debt market, new financing options for leveraged buyouts are emerging after months of lackluster activity. For the acquisition of the insurance brokerage business of Truist Financial Corp. Clayton Dubilier & Rice and Stone Point Capital are expected to bring debt worth around $8 billion to the market starting in March.
Banks are increasingly interested in private equity transactions, particularly less risky purchases that require relatively low levels of debt. JPMorgan Chase & Co. beat private lenders and provided about $2.5 billion in debt capital to support Cohesity Inc.'s planned acquisition of a unit of Veritas Technologies.
“The market appears to be stabilizing,” said Lauren Basmadjian, global head of liquid credit at Carlyle Group. “It’s the most encouraging thing it’s been in almost two years.”
Weekly review
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Investment banks like Goldman Sachs Group Inc. and Barclays Plc are seeking to restart a lucrative fee machine.
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The $1.4 trillion U.S. junk bond market is becoming increasingly choppy as more debt from the high-yield universe is either downgraded or upgraded, creating greater potential risks for investors.
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A little-noticed part of Canada's credit market is being shaken up by the country's biggest lenders, rushing into securities that shift credit risk to other investors – a play likely to be emulated by their Wall Street counterparts.
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Credit markets are signaling optimism about China's recent stimulus measures to ease the housing market crisis, easing some earlier skepticism about the impact of efforts to support the sector.
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Chinese construction company Jinke Properties and its wholly-owned subsidiary in Chongqing applied to a local court for restructuring on the grounds that the company and its subsidiaries all face capital liquidity risks.
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A group of bondholders of China South City Holdings Ltd. has asked Hong Kong's securities regulator to investigate the bankrupt developer over a possible breach of financial regulations.
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Demand for high-quality U.S. corporate bonds is becoming “unusually strong,” raising the risk of market overshooting as investors absorb an excess of supply, Bank of America Corp said.
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According to Ares Management Corp. The financing option for private lenders has the potential to reach $1.5 trillion.
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The U.S. Supreme Court rejected an appeal that could have upended the $1.4 trillion leveraged loan market, allowing JPMorgan Chase & Co. and other banks to win a legal victory.
On the way
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Bank of Nova Scotia has hired Raad Hossain from Bank of Montreal as director of structured products in fixed income, currencies and commodities.
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Allen & Overy has hired John Goldfinch from Milbank as a partner in its global structural finance practice.
– With assistance from Ronan Martin and Jill R. Shah.
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