Major M&A can do the good work of bad news
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Major M&A can do the good work of bad news

Two businesswomen shaking hands.

A financing boom might succeed where stress has failed in easing corporate spreads

BHP’s unsolicited £31bn offer for its mining rival Anglo American is great news for debt markets and promises to help restore balance to parts of the bond market that have long been detached from reality.

Last week, BHP went public with an offer for its UK competitor. Anglo's board has rejected the offer, saying it undervalues the company.

The proposed deal is all-share, meaning no debt will be required to finance it, though if it goes through the new company may need to refresh its loan facilities.

But the offer is still a boon for the corporate bond and loan markets.

A headline-grabbing jumbo deal like this, even if it never comes off, will ignite ideas in the brains of chief executives and the M&A bankers who dance around them, trying to tempt them to do deals.

Bankers last week flagged Europe's chemicals and industrials sectors as two with high potential for big M&A.

And an Anglo deal could yet yield a big debt financing. BHP's approach might flush out a rival to make a bid, which could be debt-financed.

Big enough to count

But more M&A might help the corporate bond market, beyond just the chance of some more deals. If they come, they could restore some balance to the gravity-defying market.

Since November, Europe’s high grade corporate bond market has been rallying. On Tuesday, the iTraxx Europe Main opened at 55bp, down from the high 70s and 80s in October and November.

The tightening has been useful for issuers. Double-A rated Roche this week became the latest to take advantage of the long end bid, when it printed an €850m 3.564% 2044 bond at an eye-watering 83bp over mid-swaps.

But the rally is also causing disquiet among borrowers and investors, as they do not trust it.

At the end of 2023, multiple investors confidently said the rally was over and spreads would widen in early 2024. Many said the same at the end of March.

Now, many syndicate bankers and investors reckon the run-up will go on until the summer, at least.

Ignoring disaster

Meanwhile, war is raging in Ukraine, there has been a severe escalation of violence in the Middle East and the path of interest rate cuts is highly doubtful.

Through all this, the corporate bond market has cruised along without a care, because of the huge amount of cash flowing into the asset class. Investors want highly rated corporate bonds so they don't have to worry about default, but can earn a bit of spread to cushion them against volatile interest rate swings.

But that spread is wearing precious thin, and investors are no longer feeling properly compensated for risk.

M&A could be the catalyst to bring balance to the market. Instead of scary geopolitics worrying investors enough to pull money out of the market, or at least stop pumping it in, some big M&A financings would soak up some of the excess liquidity.

If there are enough big deals, spreads might widen to a level that more accurately reflects the very real concerns in wider markets, not on bad news, but — in an irony fitting the quixotic way the market has behaved all year — on good news.

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