While the market for corporate bond issuance has been relatively quiet among the recent broader market turbulence, in a few hours a historic new bond is about to price and be sold to investors. Earlier today, Anheuser-Busch InBev NV, the acquiror in the second largest M&A deal of 2015 valued at $117 billion and just shy of Pfizer's massive $160 billion merger with Allergan, started offering bonds that will back its takeover of SABMiller Plc in a sale that according to Bloomberg [15]will stretch into Europe and is set to become the biggest corporate-debt offering on record.
Anheuser-Busch InBev may sell about $25 billion of dollar-denominated bonds, and has already gotten well over $100 billion in orders ($110 billion according to the FT [16]) for the offering. That’s more than the $75 billion of loans it has lined up to help fund the takeover. AB InBev is expected to tap debt markets in other regions later.
Indicatively, the $110 billion (and growing) order book is already bigger than the $101 billion lined up for Verizon's 2013 $49 billion mega deal.
According to Bloomberg [15], the sale is the biggest test in years for credit markets that are grappling with a slowdown in China, a commodities slump and the first U.S. interest-rate hike in almost a decade. The concern has pushed corporate borrowing costs to the highest in more than three years.
As the chart below shows, the dollar offering alone would be eclipsed only by Verizon Communications Inc.’s $49 billion deal two years ago to fund its buyout of Vodafone Group Plc’s stake in a wireless venture.
A BBG blast moments ago has since revised the total offering size to $40 billion and if demand continues, it may just eclipse the monster Verizon deal.
Judging by the level of oversubscription, the company will not have a difficult time finding yield-starved managers of other people's money, however some are skeptical: "There’s probably a lot of demand just given the name and credit quality, but at the same time there is also a lot of risk, most notably the risk of a potential downgrade, the risk that the deal doesn’t go through, and the volatility of the markets in general,” said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets. “There is also the fact that issuance so far this year hasn’t necessarily been the best.”
Other don't care, an are just hoping to buy and flip:
“A deal this big usually has to come with a concession,” said Jack Flaherty, a money manager in New York at GAM Holdings AG, which oversees $127 billion. “We are buying."
BBG adds that the offering is the biggest since the Fed ended its zero-rate monetary policy last month and comes at an increasingly volatile time in credit markets. Investment-grade bond buyers are demanding a premium of 180 basis points over Treasuries, the most in about three years, according to Bank of America Merrill Lynch bond indexes.
Judging by the giant size of the deal, one wonders where the 10Y, and the entire curve, would be trading today if it wasn't for the ongoing rate locks to hedge out interest rate risk in the form of shorting virtually every point in the curve by deal participants.
So while we await for the final deal to take shape, here is the latest guidance as blasted out moments ago by Bloomberg.
- 3y fixed guidance +90a; IPT was +120a.
- 3y FRN guidance 3mL equiv; IPT was 3mL equiv
- 5y guidance +125a; IPT was +145a
- 5y FRN guidance 3mL equiv; IPT was 3mL equiv
- 7y guidance +155a; IPT was +165a
- 10y guidance +165a; IPT was +180a
- 20y guidance +195a; IPT was +210a
- 30y guidance +210a; IPT was +225a
- Guidance area all +/-5
Bloomberg adds that, not surprisingly, the long maturities said to attract most demand.
Several years ago, when AAPL came to market with a comparable massive offering it top-ticked the bond market if only for a few months. Will today's AB InBev deal do the same for corporates, and just how much higher will Treasury paper trade once the rate locking is no longer a factor?
For all those who are unable to get in on today's deal, don't despair: there are many more massive M&A deals on the horizon as the 2015 M&A surge has to get funded in the bond market.
[17]
Finally, for those who are worried that it may be difficult to place such massive tranches, don't be.
According to BofA, the average high grade new issue tranche size rose 12% YoY to $793mn in 2015, reaching the highest level since at least 2006.
Some more observations from Bank of America:
A number of large M&A deals contributed to the higher tranche sizes last year. The increase, however, was much broader, impacting financials and utilities in addition to industrials, where the M&A activity was concentrated.
Interestingly, the high average tranche size last year was actually close to the $790mn average for 2008 – right in the middle of the financial crisis. Back then of course, liquidity was severely constrained, thus favoring supply in larger tranches and from benchmark issuers. Similarly, the jump in the average tranche size last year also reflects liquidity concerns, which were exacerbated by the approaching start of the Fed rate hiking cycle. Hence, investors preferred less frequent, but larger, deals with better liquidity and issuers delivered.
In our view, concerns about liquidity of smaller tranches are well justified. We estimate that last year, for example, the turnover of larger bonds was over 70% higher than for smaller issues. This analysis is based on on-the-run high grade index eligible bonds that generally account for most trading. Hence monthly turnover for bonds $1bn or larger in size averaged 10% last year, compared to 6% for bonds with notional under $500mn (Figure 5). Moreover, this difference in liquidity rose sharply during the summer when spreads widened on higher than expected supply. In August, the turnover ratio for the $1bn and larger cohort peaked at 2.4x the turnover ratio for bonds less than $500mn in size (Figure 6).
Just like FANG came to dominate the equity market, so a few massive bond issuers are slowly but surely becoming synonymous with the Investment Grade corporate market.
