The acquisition financing pipeline is shrinking, which favors credit

(May 28): Companies now have fewer foreclosures to refinance in long-term debt markets than they did a few months ago, which could help boost bond yields this year.

More than US$67 billion (RM314.95 billion) worth of acquisition-related receivables were sold in the first quarter – roughly double the same period in 2023 and 2022 – leaving at least US$60 billion to be financed in the remaining nine months According to documents and reports prepared by Bloomberg News. The plan mainly consists of bridge loans – short-term debt used to finance acquisitions that are later replaced by longer-term, cheaper corporate bonds.

This year, companies have rushed to refinance bridge loans ahead of November’s U.S. presidential election, which could create turmoil in debt markets and increase borrowing costs. At the same time, investors were eager to buy bonds to keep yields relatively high before the Federal Reserve (Fed) potentially began lowering interest rates.

“Financing costs remain high compared to the last decade, so bond issuance will necessarily slow to the level required by corporate goals and policies,” said Scott Kimball, chief investment officer at Loop Capital Asset Management. “This will be a tailwind for secondary markets because the ability to buy high-quality corporate paper above 5% will not last forever.”

Market specifications remain stable despite a glut of new offerings. Risk premiums average 87 basis points compared to comparable U.S. Treasuries, according to a study published at the end of 2021. Bloomberg index.

“The solid issuance did nothing to shake the solid technical conditions,” said Winifred Cisar, global chief strategy officer at CreditSights. “Trades have been struck at tight spreads/new issue concessions, the order books are strong and life seems good if you have been an IG issuer lately.”

Some of this year’s largest buyout financing deals have already been completed. This includes drugmaker Bristol Myers Squibb Co’s Valentine’s Day bond sale – totaling $13 billion – to underwrite its purchase of Karuna Therapeutics Inc and RayzeBio Inc. A few days later, Cisco Systems Inc sold $13.5 billion in bonds to buy data services provider Splunk Inc. A day later, biotech giant AbbVie Inc sold $15 billion to finance its acquisitions of ImmunoGen Inc and Cerevel Therapeutics Holdings Inc.

“The market cleared much of the backlog of acquisition financing in the first quarter,” said Teddy Hodgson, co-head of global investment-grade syndication at Morgan Stanley. “We expect the number of large M&A transactions (mergers and acquisitions) in the second quarter to not be as large as in the first quarter.”

Issuers have outpaced bond sales this year, largely due to the upcoming rematch between President Joe Biden and former President Donald Trump. “An election at the end of the year is clearly a risky event,” Hodgson said. “Many issuers do not want to be in a position where they have to trade in the third or fourth quarter in the event of election-related volatility.”

Expectations that the Fed will keep its benchmark rate higher for longer have also removed any incentive for borrowers to delay entering the market.

“Non-financial customers six months ago were thinking, ‘We’ll wait until the end of 2024 when the Fed cuts rates and rates come down and so on and so forth,’” Hodgson said. “It clearly went in a different direction. So the incentive to wait, if you think about it, has kind of evaporated.

While strategists continue to expect a large volume of financing to support buyouts of major companies at the end of the year, it seems less likely that it will reach the $180 billion level that Wells Fargo & Co expected in April. For comparison, last year about $130 billion was raised to finance acquisitions, Bloomberg-compiled data shown.

“There are still some mergers and acquisitions in the pipeline that are expected to be funded by the end of this year,” Maureen O’Connor, global head of high-quality debt syndication at Wells Fargo, said in an interview. “I think the bigger question is whether it will show up in Q2 (second quarter) or not in Q3 or Q4.”

As more bridge loans become available to support M&A transactions, they too will need to be refinanced at a later date – most likely in 2025, as loans typically mature in 364 days. However, according to Barclays plc, the delay between the deal announcement and financing will make it difficult to obtain financing before the end of the year.

“Current M&A supply is near record pace, but M&A bidding looks quite subdued for the remainder of the year,” banking analysts led by Dominique Toublan wrote in an April note.