Competition over corporate bonds set to intensify, investors fear

Investors across the US are fearful that competition for corporate bonds could grow following a clampdown on mergers and acquisitions (M&A) by the US Government.

There is great potential that the demand for corporate bonds could intensify because of the major impact that mergers and acquisitions have come to have on the supply of corporate bonds. Activity in the M&A sector has increasingly driven the supply of such bonds ever since 2013, when deals began to become more common. Indeed, the overall US investment-grade issuance was far more than $1 trillion in 2014 and 2015, the Financial Times reported.

Already this year, several major M&A deals have been blocked by the US Government, including the merging of pharmaceuticals giants Pfizer and Allergan due to tax queries and the planned acquisition of Baker Hughes by oilfield-services company Halliburton. The collapse of the Pfizer/Allergan deal has been catastrophic for investment banks, as they were expecting to reap deal fees of around $350 million from the transaction, which would have been the largest amount in M&A history.

So while many investors had predicted that the 2016 deal level would be either on par with or just slightly under the levels recorded over the last two years, this now looks not to be the case due to the blockage of M&A activities.

The Government's clamping down on mergers and acquisitions is already at its highest level since before the credit crunch began in 2007, Dealogic has confirmed. Indeed, transactions worth around $376 billion have been blocked this year already.

A crackdown on mergers and acquisitions has investors on edge over the potential that competition for corporate bonds could intensify if rules scuttle other large deals.

Bonnie Baha, head of global developed credit at DoubleLine Capital, told the Financial Times: "If you get more of these capricious proclamations that are directed to the business merits or anti-competitive merits of combinations, that would be a bigger concern. We're in an election cycle now and whatever the landscape looks like today could be dramatically different in a year from now."

Investors are now becoming increasingly worried that, in the absence of M&A deals, competition for US 'high-grade debt' will continue to intensify.

Brendan Moran, global co-head of corporate origination at Société Générale, told the newspaper: “Demand is outstanding. We have continued to see net fund inflows into fixed income, particularly into credit — corporate has that safe-harbour feel to it.”

Deals have been far oversubscribed, Mr Moran went on to say, as the demand has meant that companies have managed to obtain extremely appealing interest rates. However, as a vast number of companies have already extended maturities off the back of these low interest rates, issuers may need some more enticing in order to return to the market, particularly in light of a likely slowdown in M&A transactions in the US.

The blockage of major M&A deals also looks set to bring an end to future inversions, which will in turn lead to a number of other key transactions being shelved. This is something which will serve to make the US a far less appealing prospect for M&A dealmakers from across the globe.

Chris Stirling, global lead for life sciences and healthcare at KPMG, told City A.M. that “all big inversions are probably off the table” now.

"My guess is that boards would really struggle to put a proposition to do a big inversion to their shareholders in the light of what’s happened on this particular deal," added Mr Stirling.

Martin Gouldstone, BDO's M&A director specialising in healthcare, agreed with Mr Stirling, telling the publication: “The larger corporates outside of the US are going to think twice before they make acquisitions in the US.”

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