Europe set to take a bigger bite of global M&A

* Global M&A-related issuance predicted to reach US$200bn in 2016

* Europe prepares to cash in on blockbuster M&A

By Laura Benitez

LONDON, Dec 16 (IFR) - The European corporate bond market stands to take a big chunk of a bursting M&A pipeline as a higher US interest rate environment and trickier dollar market backdrop will lure borrowers across the pond.

Over US$82bn of M&A-related bond issuance has been publicly announced from an expected US$200bn pipeline, and some European bankers say that as much as 25% of that figure could be coming Europe's way.

Europe has traditionally played second fiddle to the US bond market, which is notorious for easily absorbing multi-tranche, multi-billion trades. But US investors have become more risk-averse of late, demanding higher premiums and more rigorous covenants on new supply.

"The US credit market will be tested next year, so it will depend on the reaction to the rates environment, but we estimate around 20% of this year's M&A refinancing to be issued in the European market in 2016," Jason Russell, deputy head of bond syndicate at Societe Generale (Swiss: 519928.SW - news) said.

Highly rated issuer Visa (A1/A+) had to pause before pulling the trigger on a US$16bn bond deal to finance its acquisition of its former European subsidiary last week and concessions paid by some issuers have become elevated.

Europe also offers a well-tested hybrid debt market, widely used by issuers to fund their aggressive corporate strategies, such as M&A. Hybrids, which receive 50% equity credit at the major ratings agencies, are seen as a way for companies to raise cheap equity.

US RESTRICTIONS?

Furthermore, an interest rate hike from the Fed in 2015 will consequently result in higher bond yields and coupons, relative to equivalent euro investment-grade issues.

"The expected rate increase in the US may have an effect on the bond take-outs for M&A deals. There's a chance for the euro market to see more of this supply as absolute coupons are still very attractive," Marc Tempelman, co-head of debt capital markets at Bank of America Merrill Lynch said.

Ten-year US Treasury bonds are bid at a yield of 2.26%, while German government bonds of the same tenor are bid at around 0.60%, according to Tradeweb prices.

European investment-grade credit spreads are expected to tighten around 5bp-10bp next year, according to Barclays (LSE: BARC.L - news) ' 2016 Global Credit Outlook.

An expected rise in US default rates could also play in Europe's favour, bankers say, as risk-averse investors will push corporate funding costs up further.

The US default rate will reach 5.5% in 2016, compared to those of Europe, which will stay at this year's levels of around 2%, according to Barclays data.

BLOCKBUSTER TRADES

Three deals, including a US$40bn-$45bn bond take-out from AB InBev, a US$22bn financing from Teva and a rumoured US$20bn bond from Aetna - for its acquisition of Cigna Corp (NYSE: CI - news) - are waiting in the wings.

Teva Pharmaceutical Industries is planning to sell US$22bn-equivalent across US dollars, euros and sterling to partly finance its acquisition of Allergan (NYSE: AGN - news) 's generic drug business.

The other well-flagged bond deal for next year will originate from the US$130bn merger between brewer Anheuser-Busch InBev and SABMiller (Xetra: BRW1.DE - news) . The deal is expected to result in issuance across a mix of currencies, including euros.

In the oil sector, Royal Dutch Shell (Xetra: R6C1.DE - news) is expected to issue 19bn-equivalent of new bonds in euros, sterling and US dollars in early 2016, in relation to its proposed US$70bn takeover of BG Group (LSE: BG.L - news) .

"Euros are likely to remain the funding currency of choice for US issuers with significant European revenues and for corporates looking to fund M&A activity," according to Morgan Stanley's 2016 European Credit Outlook.

Reverse Yankees rounded off a bumper year in 2015, with investment-grade euro-denominated issuance topping 57bn, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data.

"Yield differentials and a weaker euro are likely to keep the reverse Yankee theme alive for longer," said Morgan Stanley's outlook. (Reporting by Laura Benitez; Editing by Helene Durand and Philip Wright)