LPC: Lenders to embrace a record Broadcom bridge loan

By Lynn Adler

NEW YORK, Nov 10 (Reuters) - Banks are eager to open their wallets for what could be the biggest syndicated loan financing ever for an investment-grade acquisition, if chipmaker Broadcom’s unsolicited US$103bn bid to buy Qualcomm (Swiss: QCOM-USD.SW - news) is accepted.

With (Other OTC: WWTH - news) lending to back high-quality mergers and acquisitions down 18% this year from the same 10 months last year, bankers said they hope this deal comes to fruition and sets the stage for more dealflow.

Five banks - Bank of America Merrill Lynch, Citigroup (NYSE: C - news) , Deutsche Bank (IOB: 0H7D.IL - news) , JP Morgan and Morgan Stanley (Xetra: 885836 - news) - told Broadcom (Frankfurt: 28425279.F - news) they are “highly confident” they can arrange the funds needed for a takeover that is valued at US$130bn including debt. Broadcom is rated BBB- by S&P and Baa2 by Moody’s.

This tactic, often used for large hostile takeovers, allows borrowers to avoid paying fees on funds committed by banks to a huge deal that may not take place. Banks do not immediately tie up their balance sheets, while signaling to markets that financing will be there if the deal is approved.

"We’ve been talking about when the first US$100bn deal is going to come for a while,” said one banker, adding there is plenty of demand to accommodate a funding of this size.

“The attractiveness of something like this is the fees you get on the bonds.”

Specific financing plans for the deal are not yet clear.

If there is an initial bridge loan of around US$100bn, upfront fees to arranging banks would be at least US$100m - and possibly much more, according to Freeman Consulting Services. If roughly US$100bn of investment-grade bonds are issued later, banks would earn an additional US$400m to US$600m in underwriting fees.

Asked about the risks of underwriting a jumbo bridge at a time of potential geopolitical upheaval, the head of investment banking at one of the banks involved said: "Yes, there are idiosyncratic risks out there, but the markets feel pretty good. If it were a Single B rated deal it would be a different story, but we are confident about providing a bridge for a deal like this at the moment."

BRIDGE RECORDS FALLING

The bridge financing is likely to exceed the record US$75bn loan that backed Belgium-based global brewer AB InBev (Brussels: ABIT.BR - news) 's takeover of SABMiller (Other OTC: SBMRY - news) in 2015.

Verizon Communications (LSE: 0Q1S.L - news) ’ US$61bn bridge loan in 2013 to acquire the stake in Verizon Wireless it didn’t already own from Vodafone is the second-biggest such deal globally and the largest US bridge loan.

German drug and chemical company Bayer (IOB: 0P6S.IL - news) backed its takeover of US seed company Monsanto (Hamburg: 1132157.HM - news) with a US$57bn bridge loan, the third-biggest loan.

“The questions are how long will banks hold the risk on their books, how fast can banks de-risk and how big of a bond deal can you do in a single gulp?” the first banker said. “The biggest single gulp has been Verizon’s US$49bn bonds, and the market is clearly more robust now than it was then.”

The high-grade corporate bond market saw its busiest October issuance ever, at US$131bn, while dealer inventories were at their highest since July 2014.

Such a large new bond issue would likely become part of indexes that investors use as benchmarks, and investors as a result would need to add exposure, several bankers said.

“We haven’t heard how much they’re going to raise, but obviously it will be very big numbers and it will be interesting to see what ratings emerge,” a third banker said. “My guess is that the debt will be priced to move.”

Along with bonds, permanent financing is likely to include short-dated term loans of varied maturities, helping assure rating agencies of the merged company’s deleveraging plans, this banker said.

TRUST OR ANTITRUST?

Broadcom told Reuters that it would not rule out a proxy fight to push this merger, which is seen reshaping the industry at the core of mobile phone hardware.

In addition to the initial bank group’s highly confident letters, Silver Lake Partners committed to provide Broadcom with US$5bn of convertible debt financing.

Without US tax reform one year into the Trump administration, mergers have mostly been by companies seeking growth by buying complementary businesses while expecting little regulatory push-back.

Earlier in the year, two major proposed health insurance mergers – Aetna (NYSE: AET - news) with Humana (NYSE: HUM - news) and Cigna with Anthem – were scrapped by separate antitrust rulings. The US Department of Justice is now pushing AT&T (Sao Paolo: ATTB34.SA - news) to shed key assets to satisfy antitrust concerns, clouding the timing of the deal’s close.

As some mergers drag on, and US tax policy debates escalate, attention strongly shifts to Broadcom.

“All eyes are on Broadcom,” said the third banker. “This deal might persuade other companies to redouble efforts or take a fresh look at something they might have shelved because of tax and other uncertainties in Washington.”

(Additional reporting by Matthew Davies in London) (Reporting by Lynn Adler; Editing By Chris Mangham and Michelle Sierra)