Wednesday, July 29, 2015
Massive acquisition financings are multiplying. Israeli pharmaceuticals firm Teva Pharmaceutical Industries is lining up $27 billion of debt to finance its $40.5 billion acquisition of Allergan's generics business, following hard on the heels of a similar $26.5 billion, 364-day facility backing U.S. health insurer Anthem's $54.2 billion acquisition of health services company Cigna Corp.
The two jumbo financings, which total $53.5 billion, show that bridge loans to bond issues remain the favored financing option after a recent wave of blockbuster multibillion dollar acquisitions.
Bridge loans finance acquisitions in the gap between when the deals are announced and permanent long-term capital structures are put in place, typically in the bond market.
Teva, which expects to finalize financing commitments by mid-August, could overtake Anthem's deal as the biggest bridge loan of the year to date. Both facilities easily outstrip biopharmaceutical company AbbVie Inc's $18 billion bridge loan in March, which financed its $21 billion acquisition of Pharmacyclics Inc.
Teva's acquisition will be funded through $33.75 billion in cash and shares in Teva valued at $6.75 billion. The cash portion of the deal will be funded through a combination of new equity, the debt financing and cash on hand.
A banker said that he expects Teva to issue most of its $27 billion debt in the bond market. Anthem is also planning to refinance its bridge loan with up to $20 billion of bonds, analysts told IFR.
Surging merger and acquisition in healthcare and insurance sectors are boosting the volume of bridge loans and jumbo bond takeouts as market conditions remain favorable for financing highly-rated companies despite mounting macroeconomic tailwinds as China's stock market slumps, commodities and oil prices sink and the world braces for a U.S. interest rate rise.
Bridge loan volume for investment grade companies of $45.38 billion in the first half of 2015 is up more than 8 percent from $41.88 billion in the first half of 2014, according to LPC data.
U.S. healthcare company Aetna also lined up a $16.2 billion bridge loan to fund its $47 billion acquisition of smaller rival Humana Inc which was announced on July 3. The company is planning to part refinance the cash and stock acquisition with $13 billion of bonds.
The number of jumbo bond issues which have been successfully placed this year is growing, which is giving confidence to borrowers and banks to underwrite bridge loans for new acquisitions as companies start to spend their cash piles buying rivals.
In the first half of 2015, four investment grade bond deals exceeded $10 billion, according to Thomson Reuters Deals Intelligence. Another three have been added so far in the second half.
The first half of the year set a new semi-annual record in the bond market, with over $700 billion of investment grade bonds issued, according to LPC data. More than $640 billion was placed in the first half of 2014, according to Thomson Reuters Deals Intelligence.
INCREASED CONFIDENCE, DIVERSITY
M&A activity has increased in 2015, due to a stronger U.S. economy which is boosting executives' confidence that making acquisitions is the best way to generate value.
"People have been talking about this M&A uptick for a while now, so it's good to see it's starting to actually resurface, and it's a fairly broad base," a banker said.
As M&A activity has increased, the loan market has seen more bridge loans backing deals of varying sizes.
"The bridge market has been much more active, particularly in recent months, than if you go back a year-and-a-half, two years ago," a second banker said.
Bank of America Merrill Lynch is providing a $3.7 billion, 364-day senior unsecured bridge facility to back medical device manufacturer St Jude Medical Inc's $3.4 billion acquisition of circulatory support device maker Thoratec.
And data center operator Digital Realty Trust lined up a committed $1.85 billion senior unsecured 364-day bridge loan to back its acquisition of data center collocation company Telx.
Some deals with a higher certainty of execution that do not run foul of antitrust laws or regulators can bypass the loan market and go straight to the bond market. UnitedHealth Group raised $10.5 billion of bonds in July to finance its $12.8 billion acquisition of pharmacy benefit manager Catamaran, although this remains relatively unusual.
"If you look at how many times it's been done, it's still very rare to take a significantly sized trade and go direct to the bond market," said a third banker.
The fact that bridge loans are being refinanced easily in the bond market is encouraging arranging banks to hold more of the bridge loans in a small club of banks rather than syndicating the debt to boost overall returns.
"Banks are holding more because it (bridge loans) can get taken out easily, so there's less bond economics for other banks," a fourth banker said.
Bankers expect M&A to pick up in the second half of 2015, according to an LPC survey. Bankers also expect to see as much as $200 billion of M&A issuance from investment grade companies in 2015, the same survey said, after $63 billion in the first half of 2015.
"If the demand for paper is there, corporate boards are going to be more comfortable with doing something larger, more transformational," a fifth banker said.
reuters.com
