Lenders and arrangers in the bond and loan markets want more corporate borrowing, and at higher fees and margins, but will be hoping for a controlled expansion of credit, without sudden spread widening, debt crises or defaults.
The £18.5bn ($33bn) bridge loan that Citigroup, Goldman Sachs and Royal Bank of Scotland have won the mandate to arrange for the Spanish telecom company is the largest acquisition-related loan in the last five years, surpassing the $27.3bn facility that backed France Télécom's purchase of UK mobile company Orange in 2000.
Good news for investors and underwriters, perhaps — but they will also remember that France Télécom's acquisition spree pushed its credit to the brink of junk territory in 2002 and that it needed a complete recapitalisation to get back to its present A3/A- ratings.
Standard & Poor's acted immediately to penalise Telefónica, cutting its ratings on Monday from A to A- long term and A-1 to A-2 short term. The rating will fall to BBB+ if the acquisition is completed as expected in January.
Moody's put Telefónica's A3 rating on review for possible downgrade.
The credit markets' appetite for the acquisitive Spanish company's risk will be put to the test soon, when it refinances its bridge facility.
Telefónica's arrangers are likely to syndicate much of the loan in the next few weeks, leaving £6.5bn-£8bn, according to various estimates, to be financed in the bond market, likely by the end of February.
The £18.5bn loan, Telefónica said, has a maturity that can be extended to two, two and a half, or three years and will pay a margin of less than 40bp over Libor.
One loans banker said the deal was not generously priced for such a large takeover, but that the loan market had the capacity to absorb it.
Telefónica's last syndicated loan was a Eu6bn six year revolver, signed in June, which paid 16.25bp over Euribor. Because the new loan is backing an acquisition, lenders will expect the company to pay a premium.
The June deal was arranged by ABN Amro, BBVA, JP Morgan, La Caixa, Royal Bank of Scotland and Banco Santander Central Hispano. The proceeds were used to refinance existing debt and finance Telefónica's July acquisition of Czech carrier Cesky Telecom.
Endgame pattern emerges
The two reasons why Telefónica's deal could prove a turning point are its sheer size and the fact that a clear pattern is beginning to emerge from the jigsaw puzzle of European telecoms. A few leading players are emerging and they are likely to soak up many smaller competitors in the next few years as they vie for supremacy.
A big round of M&A in telecoms could make that sector drive the credit cycle, as it did in 1999-2001.
"During the past three years companies have been deleveraging and now have their balance sheets in good shape," said another loans banker. "Telefónica was one of several companies in a good position to move for O2."
Telefónica's bid, announced on Monday, prompted speculation that Deutsche Telekom would launch a counter-bid, but the German company ruled that out on Wednesday.
Accountancy firm KPMG reported this week that the fastest growing companies among the world's top 100 telcos by revenue are smaller, emerging market operators. That is likely to encourage mobile telecom consolidation, as companies in saturated markets hunt for ways to grow.
"There has been virtually no movement year-on-year at the top of the table when measuring companies by revenue," said Sean Collins, KPMG's global head of telecoms. "It is a classic premier league scenario: it is very hard to make inroads into the top positions.
"If you look across the European market you are now seeing the emergence of three big cross-border players — Deutsche Telekom, France Télécom, and now Telefónica."
Other commentators would add Vodafone to that list of leading consolidators in the industry.
France Télécom bought Spanish mobile operator Amena for Eu6.4bn in July, which Collins said compelled Telefónica to hit back by investing in a market where France Télécom was well established.
"The UK is one of those markets, and one where France Télécom [through Orange] has a very strong position to be challenged," said Collins.
However, Collins said the Telefónica-O2 deal was unlikely in itself to lead to an increase in telecommunications mergers.
"There is a lot of acquisition activity in the European telecoms sector already," he said. "Voice prices continue to fall and profit margins remain under pressure."
One banker said the success of Telefónica's move would depend on how effectively it carried out its strategy in the UK. "Competition in the market is robust, but there are big numbers of people and a lot of potential," he said.
This week Eircom of Ireland received a Eu3bn takeover approach, reportedly from Swisscom, while Norway's Telenor agreed to buy Vodafone's Swedish operations for Eu1bn.
Yesterday (Thursday) Vodafone also said it planned to spend up to $2.4bn on buying a further 15% of South Africa's Vodacom, taking its stake to 50%.