US mega-mergers test Wall Street's appetite for debt

WASHINGTON • Wall Street's dealmakers are about to find out how much longer the seven-year, corporate-debt binge can last.

With two mega-mergers announced over the past two days, debt investors will be asked to lend as much as US$120 billion (S$166 billion) to finance the combinations of brewers Anheuser-Busch InBev and SABMiller and tech giants Dell and EMC Corp.

The transactions would, respectively, bring the largest corporate-bond sale ever as well as a record offering by a junk-rated issuer, Dell. The trick will be finding ample demand for those deals - along with at least US$130 billion of bonds and loans in the works - in a market that has recently had a bad case of indigestion.

"If we get one or two of these to swallow a month, the market will likely bear it," said Mr Andy Toburen, a high-yield money manager at Chartwell Investment Partners, which oversees US$8.1 billion in assets. "If it comes all at once, it will prove to be too much."

Companies have been rushing to take advantage of cheap borrowing costs in the United States before the Federal Reserve moves to lift interest rates from zero for the first time since the 2008 financial crisis. Almost US$1.1 trillion of investment-grade bonds have been sold this year, putting 2015 on course for an annual record.

Strains have been emerging more recently, though. Just one junk-rated corporate issuer has managed to sell debt this month, a pace that would make it the slowest October on record, according to data compiled by Bloomberg.

The drought comes after a third quarter that handed high-yield bond investors a 4.9 per cent loss, the worst three-month period since 2011, Bank of America Merrill Lynch index data showed.

The turmoil is causing those cheap borrowing costs to fade quickly. The average extra yield investors demanded to own company debt - from the riskiest to the most-creditworthy - climbed to as much as 2.74 percentage points this month, the highest in three years. Bond buyers have been particularly concerned about the effects of a commodities slump that has left miners and oil producers struggling to manage record amounts of debt they took on to fund production.

Investors have redeemed a net US$8.9 billion from US high- yield funds this year while US mutual funds and exchange traded funds that buy leveraged loans have seen about US$11.7 billion of net outflows, according to Lipper. Meanwhile the creation of collateralised loan obligations, the biggest buyers of high-yield loans, has slowed.

All of this is starting to disrupt the riskiest debt deals. Fullbeauty Brands, an apparel retailer for plus-sized people, is offering one of the biggest discounts this year to complete its US$1.2 billion loan deal financing its buyout by Apax Partners, three people with knowledge of the deal said on Tuesday.

Canadian company SunOpta and machine-parts maker NN both pulled bond deals this month after struggling to attract investor interest, meaning they will now be leaning on their banks for backup financing for acquisitions.

"Those that have pushed the envelope from a leverage standpoint and appear to be relying on synergies and cost- savings, those are potential trouble spots," Mr Toburen said.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 15, 2015, with the headline 'US mega-mergers test Wall Street's appetite for debt'. Print Edition | Subscribe