AB InBev M&A sparks debt buzz

(This story was originally published in IFR, A Thomson Reuters publication)

By Tessa Walsh and Shankar Ramakrishnan

NEW YORK, Sept 22 (TRLPC/IFR) - The highly liquid global debt markets are in fine fettle and easily capable of financing another mammoth M&A deal of around US$100bn, bankers said at LPC's 20th annual loan conference in New York.

This is good news for Anheuser-Busch InBev, which is reportedly sounding out the market on a massive loan and bond financing to back an estimated US$122bn bid to buy global beer rival SABMiller (LSE: SAB.L - news) .

The deal would rewrite debt market history as the biggest-ever takeover financing and would turbo-charge the long-awaited upturn in M&A activity and bank revenue.

Global M&A lending stood at US$470.5bn for the year to September 9, 50.4% higher than the US$312.7bn achieved in the same period last year. Cash-rich companies are finally pulling the trigger on acquisitions, encouraged by tax inversion deals that allow multinationals to cut costs.

AB InBev declined to comment on "market rumours or speculations" sparked by a Wall Street Journal report that the company was talking to banks to ready a financing plan before it formally approached SABMiller with its bid.

Bankers speculated that the company could seek to raise a bridge loan of US$75bn-$80bn before issuing US$72bn-$110bn of bonds.

This would eclipse the record US$61bn loan financing raised by Verizon Communications (Xetra: 868402 - news) last year to back its purchase of the remaining 45% stake in Verizon Wireless that it did not already own. The bridge loan was quickly refinanced by a US$49bn bond in September 2013.

Bankers say it is a good time now to raise such a massive financing.

"Strong company performance, bank market appetite and bond market liquidity are all well aligned right now. A combination of those factors makes financing cheaper," said a senior New York-based loans banker.

AB InBev has experience of raising large loans. InBev raised US$55bn in 2008 to back its acquisition of Anheuser-Busch, in a deal that included a US$45bn loan and a US$9.8bn bridge loan to an equity issue.

BOND MARKET KEY

A report from BNP Paribas (Xetra: 887771 - news) analysts said that the massive bond issue would be in US dollars, euros and sterling.

"The key to a deal of this size is how much the bond market can absorb. It would depend on the name and the state of the markets. At the moment both are positive and it looks doable," the senior banker said.

A bond of the predicted size would, however, mean that AB InBev could find its A3/A/A ratings from Moody's, S&P and Fitch fall to BBB in the worst-case scenario and A minus in the best case.

The analysts estimated that if AB InBev used one-third equity funding and financed the rest of the acquisition in debt, its net leverage would reach 4.4x after the transaction closed.

"We assume that AB InBev can raise around US$8bn by selling minority and associate stakes owned by SABMiller, lowering net leverage to 4.0x. After three years, net leverage will amount to 2.6x, which should justify a low Single A rating," the report said.

"In a 100% debt financed acquisition, we expect net leverage to spike to 5.7x and reduce towards 4.0x after three years."

That would push AB InBev's ratings to Triple B, but bankers are still positive about the company's ability to raise a large bond.

"This is a company which was able to issue quite easily even during the crisis days and now they have higher ratings and their cost of capital would be hundreds of basis points cheaper," said one syndicate banker.

"There is huge market capacity for such deals and offering a few basis points on the table remarkably solves a number of capacity problems."

AB InBev US dollar spreads widened up to 20bp on the news as investors considered the rating implication of such a large transaction, BNP (Paris: FR0000131104 - news) 's report said.

"Whilst we cannot rule out further weakness on the back of this we take heart from AB InBev management's strong track record and conservative financial policies. Also, we would point out that this latest cheapening discounts significant credit downside and we would expect that any new issuance from AB InBev will be well received by investors in a low yield environment," it said. (Reporting by Tessa Walsh and Shankar Ramakrishnan; Editing by Chris Mangham and Owen Wild)