Bankers hedge bets on M&A bonds in rocky markets

By Laura Benitez and Natalie Harrison

LONDON/NEW YORK, July 3 (IFR) - Corporates needing to raise some US$50bn of funding to finance M&A transactions in the coming months are seeing their options narrow amid renewed market volatility and dwindling investment returns that has made the buyside more cautious.

A 2.7bn bond deal printed by US industrial Danaher (Xetra: 866197 - news) ahead of its US$13.8bn purchase of Pall Corp showed the European market was opened, albeit at a high price, and bankers believe that the US market is really the best place to go for borrowers.

"Issuers will have their eye on all markets, but the one that has held up really well through all crises is the dollar market and that's not likely to change," said Mark Bamford, head of fixed income syndicate at Barclays (LSE: BARC.L - news) .

"It's going to remain choppy until we see some kind of resolution for Greece for better or worse."

Bankers are having to weigh up options amid a growing realisation the kind of slam-dunk execution they have become accustomed to over the past few months ebbs away, and as they look to clear the decks ahead of potentially even more supply.

Worldwide M&A is up 40% in its strongest first half for deal making since 2007, Thomson Reuters data shows, and bankers say that is likely to continue into the second half.

The recent market volatility is a setback for companies with M&A cash needs that had their eye on the euro market because of the cheaper all-in borrowing costs. Instead, deals could start to be unleashed very quickly in the US.

A New York based syndicate banker is expecting the US market to stir from its unusual slumber with as much as US$30bn of supply next week - much of that M&A related.

Potential names being bandied about are Imperial Tobacco (LSE: IMT.L - news) , and possibly Danaher to complete its M&A fund raising.

TRICKY BACKDROP

This new supply will be unleashed at a time when US investors are beginning to question the risk premium they have being paid to take down billions on new bonds.

According to BofAML, global investment grade bonds yielded negative returns of 2.58% in the second quarter - the second worst performance on record.

Weakness is indeed seeping into the market. Spreads on Citi's broad US investment grade corporate index ended June at 144bp over Treasuries - their widest level since July 2013 and well outside the 125bp and 135bp range seen most of this year.

"The combination of Greek and Fed uncertainty and expanding M&A activity has weighed on spreads, Citi analyst Sonam Pokwal said.

BIG BUFFER

But US investors are not the only ones questioning the wave of supply and whether they are being fairly compensated. In Europe, they are demanding bigger buffers to make-up for the poor performance of recent issues.

While H.J. Heinz got a good deal last month, paying next to nothing in new issue concessions on a US$10bn bond to finance its merger with Kraft, the poor secondary market performance of its euros and sterling bonds in particular in the wake of the Greece crisis has left investors nursing losses on their books.

Heinz's euro paper has widened 10bp on mid-swaps basis since pricing at the end of June, while its sterling trade has widened 6bp.

The company's tactic of marketing in several currencies, and doing the chunk of financing in the dollar market, however, could set a template for others.

"We'll see more of what happened with Heinz recently - the big take out in the dollar market and doing the remaining bits in Europe to keep doors open," said a London-based banker.

Danaher paid between 20bp and 40bp of new issue premium and could set benchmark for those that follow it.

"This came at major concessions," said one US investor. "The question remains whether this reprices the entire market." (Reporting by Laura Benitez and Natalie Harrison, Editing by Helene Durand and Anil Mayre)