Bond investors hope AB InBev will wet their whistles

By Hillary Flynn and Davide Scigliuzzo

NEW YORK, Jan 12 (IFR) - Investors could easily soak up a US$60bn bond from AB InBev if the beer giant wants to sell that much debt this week to help fund its acquisition of rival brewer SABMiller (Xetra: BRW1.DE - news) .

AB InBev could raise US$30bn-$60bn in funding - perhaps setting a new mark for the largest bond ever - and the deal is expected to be a blowout success.

The buyside is primed and ready for a large and liquid high-grade bond issue to kick off a primary market that has been uneven so far in 2016, largely due to broader volatility.

"It (Other OTC: ITGL - news) will help establish a clearing level for large deals, and also help pave the way for more M&A deals to come," one syndicate banker told IFR.

"This is a defensive credit, and there will be a gravitational pull towards a deal like that."

In addition to the liquidity inherent in such a massive bond - the current record is Verizon (NYSE: VZ - news) 's US$49bn trade from 2013 - many believe the company will meet its post-acquisition targets.

One portfolio manager on a call with the company Monday said he was comfortable that AB InBev would limit dividend increases and stock buybacks for some time after the acquisition.

"They have been able to execute large mergers in the past," he said. "Management lived up to bond investors' expectations and executed well. They want to replicate that."

He said the company did not discuss details of the bond but expected multi-billion tranches with maturities of two, three, five, 10 and 30 years, as well as a possible floating-rate note.

PAY TO PLAY

Amid worries out of China, flagging commodities prices and other woes, the market has seen heavy volatility of late - which could make AB InBev have to pay more in new issue concessions.

Yet it is unlikely to have to offer the whopping premiums Verizon did on its record deal in September 2013.

Verizon offered a 50bp NIC (NasdaqGS: EGOV - news) on top of the 50bp widening in its curve after announcing its US$130bn acquisition of Vodafone's stake in Verizon Wireless in one hit.

Since those days, however, the dollar bond market has repeatedly shown its ability to absorb trillions of dollars in debt issuance.

"Verizon was very much a trek into the unknown," said one banker. "I don't think (AB InBev) will have to pay as much."

The banker expected the final concession to be in the range of 15bp-30bp, depending on the size of the offering and broader market conditions on the day. The deal is expected as soon as Wednesday.

A 30bp premium would be high in the investment-grade market for such a well-heeled corporate, but not exceptional given the potential size of the offering, bankers said.

A likely worst-case scenario would see AB InBev paying slightly more than Actavis did last year on its US$21bn 10-tranche deal to finance its Allergan (NYSE: AGN - news) acquisition - the second-largest bond sale after Verizon's.

That deal paid a measly 4bp to 6bp in concession versus outstanding bonds on the day.

"The risk for the market is if (AB InBev) doesn't price right," said the banker. "Investors are writing big checks here, and if the bonds don't trade well, that is going to be an issue."

MATURITY MATTERS

Given the recent spate of volatility, driven in part by the to and fro surrounding the Federal Reserve rates hike last month, investor demand of late has skewed to shorter maturities.

Of the close to US$30bn of bond issuance done in the last month, some US$15bn has been in tenors up to five years and almost all of the balance in 10 years, according to IFR data.

Still, AB InBev should easily be able to do some longer tenors if it decides it wants to.

"I expect the company will see demand across the maturity curve, including long maturities," said Jonathan Duensing, deputy CIO and senior portfolio manager at Amundi Smith Breeden.

The brewing giant started meeting with investors about the deal near the end of last year, and has been roadshowing the bonds to both US and European investors Monday and Tuesday.

"It is a perfect name and sector for a volatile market," said a banker away from the deal. "Look at the financial crisis: people were drinking more beer than ever before." (Reporting by Hillary Flynn and Davide Scigliuzzo; Editing by Shankar Ramakrishnan, Natalie Harrison, Jack Doran and Marc Carnegie)