Many of the companies that have announced acquisition or merger bids between July 1 and August 23 this year are also familiar names in the MTN market. Bayer, Endesa, General Electric and Royal Bank of Scotland have all been involved in M&A activity in that period and have also been frequent MTN issuers. At a time when credit ratings drive the market however, the downgrades that often accompany M&A activity are an unwelcome side-effect. According to Standard & Poor's research, 50% of all downgrades in 2000 were due to M&A activity. Data on how many upgrades were due to M&A activity was not available. But Judit Seymour, assistant vice president, Euro-MTNs, at Moody's Investor Services, does not believe that the acquirer is more likely to be downgraded than upgraded. She says: "Any rating action depends on the credit quality of the two entities merging, so it is down to each individual case and there is no tendency for the rating action to be a downgrade or an upgrade." There is no sure way of measuring the volume of M&A-driven funding in the MTN market, although one indication is that M&A funding is usually issuer- as opposed to investor-driven. One trader at UBS Warburg claims that 30% of their trades by volume are issuer driven. Chris Jones, at Deutsche Bank, explains that issuer-driven trades for M&A financing have certain characteristics. He says: "When a trade is issuer- rather than investor-driven, the issue itself is more likely to be plain vanilla. This is the quickest way to access the market but may involve sacrificing spread for speed. The notes tend to be shorter maturities, with a view to refinancing once the acquisition is complete." And the trader at UBS Warburg says: "Issuer-driven trades tend to be for bigger amounts because they have a specific requirement and are willing to pay up a little bit." He suggests that some structures are more popular with issuers looking to acquire. He says: "Perpetuals are a popular structure for M&A funding because they rank closer to equity in terms of credit default. Royal Bank of Scotland did some perpetuals last year. And, for example, National Bank of Australia has been doing a lot in the private market where it gets cheaper levels. It is staying at the short end too, so if it doesn't acquire, it won't have long-dated debt outstanding." Royal Bank of Scotland has issued 65 trades this year and is in the middle of a deal with Mellon Financial. But Nigel Owen, treasury analyst at Royal Bank of Scotland, says that they use the MTN programme for opportunistic funding and raise funds for acquisitions in other ways. He says: "We raised funds for the acquisition by placing equity. We tend to keep MTNs to smaller amounts of between $10 million and $20 million - 99% of our deals are of this size and are used for general capital housekeeping. At the moment the assets we are taking on tend to be of a longer maturity, so we're looking to pay a bit more for the longer tenors." But he adds: "In future there's no reason why we can't do capital issues. An MTN programme is cleaner documentation-wise. All we have to do is the pricing supplement." But being in the spotlight for M&A activity can make issuing in the MTN market more difficult as Jones, at Deutsche Bank, explains: "Once the M&A activity is announced, the borrower is obliged to inform the investor as a matter of due diligence. This makes their life harder because each trade may require approval from the lawyers. Often the borrower will wait until the M&A transaction is complete before returning to the market." Paul Drake, marketing director of the financial services group at Standard & Poor's, says that there is no legal obligation to inform the rating agency of any plans. He says: "Companies don't legally have to tell us when they have M&A plans - that is the formal position. If we hear about the acquisition when it goes public, the company could go on CreditWatch, but it is more typical for them to let us know in advance so we can digest the information. Some let us know well in advance if they are worried of a negative impact on their credit rating." But M&A activity can give MTN borrowers some advantages. For example it raises the borrower's profile. The trader at UBS Warburg says there is also the upside of creating investor interest. He says: "Spreads usually widen after a company announces M&A plans and the price falls. But demand may go up slightly - there is always added interest from investors after an announcement - they want to find out where the spreads are."
August 31, 2001
