Corporate mergers and acquisitions (M&A) continue to be a significant driver of the investment grade corporate bond market new issue calendar. As shown in today’s chart, M&A activity made up almost 35% of non-financial issuance in 2015, making it an all-time record total supply year. 2016 is on a similar pace. In 2015, there were 10 deals greater than $25 billion announced that were at least partially debt-financed, more than all years since the financial crisis combined. In 2016, there have been three deals of this size, in-line with those in 2014 and 2015 and at a rate that would exceed last year’s total on an annualized basis.
Subdued global economic growth has motivated many companies to seek measures to expand earnings. This has led to numerous M&A deals in order to attain more scale and reduce costs. The historically low global interest rate backdrop has been further supportive of this corporate effort and has kept borrowing costs low for the growing number of debt-financed transactions.
While the threat of more supply may weigh on credit spreads in certain sectors for a time, there are many constructive technicals still prevalent in the marketplace. The European Central Bank (ECB) recently announced that it will expand its quantitative easing program to include the purchase of investment-grade European corporate bonds beginning this June. This will impact global supply and likely provide an upper bound to spread pressures. As a result, and considering the low rate environment outside North America, reverse Yankee issuance (U.S. domiciled issuers issuing bonds outside the U.S. at subsidiaries) could continue to grow as corporations tap the markets that provide the lowest borrowing costs. Also supportive for spreads, the Federal Reserve (Fed) has dialed back its tone on tighter monetary policy, causing most market participants to lower their forecasts for the number of Fed tightenings during 2016.
Key Takeaway: The M&A related issuance in the investment-grade corporate bond market has been a meaningful portion of total issuance for the last couple of years. While this has been spurred by the quest for growth in this low interest rate environment, there are numerous technical factors that are supportive of corporate credit spreads in spite of the risk of further issuance.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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