Merger and acquisition activity is turning out to be the early credit story of the year, by sparking issuance and boosting lower-rated credits as they are snapped up by companies with healthier balance sheets. "It's about a herd mentality and wanting to be the first guy out the door," said one high-grade researcher, who noted the merger trend doesn't necessarily stem from academic, economic reasons but from companies "not being able to help themselves."
The cable sector is an area where a flurry of consolidation may occur this year, as Verizon Communications' assumption of MCI Inc. is causing the market to focus on M&A not only in telecom but across the board, the researcher said. Cable spreads in the Merrill Lynch High Yield Master II Index tightened over 30bps recently to 457 basis points over Treasuries. Companies are posting double-digit cash flow growth, but revenue is only growing by 2% and their answer to low revenue growth is M&A, the analyst explained.
M&A-related activity sparked 25% of high-yield issuance last year and may hit 30% this year, said Chris Garman, head of high-yield strategy at Merrill. As high-yield companies tend to be the targets, M&A also tends to boost high-yield credit, he said. But Marty Fridson, ceo of FridsonVision, an independent research firm, cautioned market participants not to get too excited about the increased activity and to remember the negative implications of what he calls the dark underside of M&A: leveraged buyouts.