6th March 2018

While the short-term focus of the markets has recently been on the outcome of the Italian Election, and the proposed Steel and Aluminium Tariffs by President Donald Trump; we note some interesting activity in the Corporate Credit space.

Return of the mega-deal?

The strong economic backdrop, robust earnings and cheap financing has boosted the confidence of corporate CEOs and CFOs. The end of 2017 and start of 2018 has seen a notable tick in large M&A activity; such as CVS deal to acquire Aetna ($69bn), Comcast’s bid for Sky ($31bn) and Unibail’s bid for Westfield ($16bn).

What is notable is the level of leverage that acquirers are willing to go to make acquisitions. For example, Comcast is estimated to go up to 3.0x leverage which represents a step up from 2.2x net leverage at the last year end. This is in line with the company’s historical norm.

Despite deal count falling off, deal multiples were at all-time highs in Q3 2017, with around 50% of all companies acquired priced more than 11x EBITDA.

Impact of recent volatility on new issues

The volatility in February has seen several investment grade deals priced at more attractive concessions, versus their existing bonds. Although we see this as a positive development, the yield/duration complex is still biased towards low yield and long duration, which is less appealing.

Pro-active refinancing / re-terming by HY and EM Issuers

In general terms, Corporate Treasurers tend to be astute in raising money not when they need it, but when the market is still open. This phenomenon is currently being witnessed in the HY and EM bond markets.

In the high yield space, we note a handful of borrowers are pro-actively raising debt well ahead of upcoming maturities. Hertz, as an example is looking to refinance its €425m issue maturing in January 2019.

Emerging markets saw a raft of issuance from African nations (Egypt, Nigeria and Kenya) during February. The strength of demand for EM bonds was demonstrated by Kenya, who successfully issued $2bn of debt across 10 and 30-year maturities. This is despite a ratings downgrade from Moody’s and the loss of a $1.5bn credit backstop from the IMF.

Practical impact of US Tax Reform 

In the past few weeks, our traders have noted an increase in the number of large BWICS in our Bloomberg inboxes. BWICs stands for Bids Wanted In Competition With, which are lists of bonds for sale.

Recent articles in financial journals have highlighted  the selling pressure in short dated US Bank Bonds. This is due to purported selling from Corporate Treasury desks looking to generate cash to repatriate back to the US.  However,  it is too early to predict the impact of the reforms on the new issue market.

February US IG corporate issuance was down 29% MoM although 5% higher YoY.  Lower issuance due to the repatriation of cash would be technical supportive for IG Credit, however will essentially come down to how Corporates Treasurers decide to split their financing needs across Debt, Equity and Cash.

Sources: Creditsights, Bloomberg, Bain, JPM

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