By Laura Benitez and Natalie Harrison
LONDON/NEW YORK, July 3 (IFR) - Corporates needing to raisesome US$50bn of funding to finance M&A transactions in thecoming months are seeing their options narrow amid renewedmarket volatility and dwindling investment returns that has madethe buyside more cautious.
A 2.7bn bond deal printed by US industrial Danaher ahead ofits US$13.8bn purchase of Pall Corp showed the European marketwas opened, albeit at a high price, and bankers believe that theUS market is really the best place to go for borrowers.
"Issuers will have their eye on all markets, but the onethat has held up really well through all crises is the dollarmarket and that's not likely to change," said Mark Bamford, headof fixed income syndicate at Barclays.
"It's going to remain choppy until we see some kind ofresolution for Greece for better or worse."
Bankers are having to weigh up options amid a growingrealisation the kind of slam-dunk execution they have becomeaccustomed to over the past few months ebbs away, and as theylook to clear the decks ahead of potentially even more supply.
Worldwide M&A is up 40% in its strongest first half for dealmaking since 2007, Thomson Reuters data shows, and bankers saythat is likely to continue into the second half.
The recent market volatility is a setback for companies withM&A cash needs that had their eye on the euro market because ofthe cheaper all-in borrowing costs. Instead, deals could startto be unleashed very quickly in the US.
A New York based syndicate banker is expecting the US marketto stir from its unusual slumber with as much as US$30bn ofsupply next week - much of that M&A related.
Potential names being bandied about are Imperial Tobacco,and possibly Danaher to complete its M&A fund raising.
TRICKY BACKDROP
This new supply will be unleashed at a time when USinvestors are beginning to question the risk premium they havebeing paid to take down billions on new bonds.
According to BofAML, global investment grade bonds yieldednegative returns of 2.58% in the second quarter - the secondworst performance on record.
Weakness is indeed seeping into the market. Spreads onCiti's broad US investment grade corporate index ended June at144bp over Treasuries - their widest level since July 2013 andwell outside the 125bp and 135bp range seen most of this year.
"The combination of Greek and Fed uncertainty and expandingM&A activity has weighed on spreads, Citi analyst Sonam Pokwalsaid.
BIG BUFFER
But US investors are not the only ones questioning the waveof supply and whether they are being fairly compensated. InEurope, they are demanding bigger buffers to make-up for thepoor performance of recent issues.
While H.J. Heinz got a good deal last month, paying next tonothing in new issue concessions on a US$10bn bond to financeits merger with Kraft, the poor secondary market performance ofits euros and sterling bonds in particular in the wake of theGreece crisis has left investors nursing losses on their books.
Heinz's euro paper has widened 10bp on mid-swaps basis sincepricing at the end of June, while its sterling trade has widened6bp.
The company's tactic of marketing in several currencies, anddoing the chunk of financing in the dollar market, however,could set a template for others.
"We'll see more of what happened with Heinz recently - thebig take out in the dollar market and doing the remaining bitsin Europe to keep doors open," said a London-based banker.
Danaher paid between 20bp and 40bp of new issue premium andcould set benchmark for those that follow it.
"This came at major concessions," said one US investor. "Thequestion remains whether this reprices the entire market." (Reporting by Laura Benitez and Natalie Harrison, Editing byHelene Durand and Anil Mayre)
