One month ago, we were surprised to report that the junk bond issued by French telecom company Numericable would, after its 100%+ upsizing, become the largest high yield bond on record. As we explained this was a direct consequence of the unprecedented intervention by the ECB in the European bond market unveiled one month prior, which courtesy of Mario Draghi's backstop to all non-financial corporate bond issuance, had made a virtual certainty that the European bond corporate market was the next bubble as there was effectively no longer any risk in holding not only investment grade, but also junk paper, now that starved for yield investors would flood into anything that carried even a modest yield premium.
Today we find an even more striking example of just how broken the global bond market has become thanks to the ECB because as Reuters writes, Bayer could receive financing from none other than the European Central Bank to help fund its takeover of the world's largest seed company, US-based Monsanto, according to the terms of the ECB's bond-buying program.
As reported yesterday, Monsanto turned down Bayer's $62 billion bid on Tuesday, but said it was open to further negotiations. Bayer, which many were surprised by its eagerness to pursue a quasi-hostile offer, promptly agreed to get more actively involved in the negotiation process. Now we know why: the cost of debt would be funded by none other than the European Central Bank.
As we documented back in March when describing the terms of the ECB's CSPP, or corporate bond buying program, the ECB can buy bonds issued by companies that are based in the euro area, have an investment-grade rating and are not banks, provided that they are denominated in euros and meet certain technical requirements. The purpose for which the bonds are issued is not among the criteria set by the ECB, which will start buying corporate bonds on the market and directly from issuers next month.
It now appears the "use of funds" may be M&A, and even LBOs.
This means that, in theory, the ECB could buy debt issued by Bayer, which said on Monday it would finance its cash bid for Monsanto with a combination of debt and equity. And since the ECB will buy a substantial amount of debt Bayer has to offer and will likely provide it with preferential terms, it explains why Bayer has been so surprisingly price indiscriminate to confuse even Bayer's own shareholders. It also explains why if the Bayer deal goes through, the world will likely see a surge of ECB-funded M&A deals unleashed by European corporates eager to sell billions in debt to Mario Draghi.
"It will be interesting to observe how much of such a deal would be absorbed by the central bank," credit analysts at UniCredit wrote in a note.
The ECB is buying 80 billion euros ($90 billion) worth of assets every month in an effort to revive economic growth in the euro zone by lowering borrowing costs.
According to Reuters, central bank sources said it would not be the ECB's first choice if the money it spent ended up financing acquisitions, however they have no say.
Reuters adds that "even this would have a silver lining if consolidation made an industry or sector more efficient and if it gave fresh impetus to the stock market, the source added."
And if issuers ended up exchanging the euros raised through bond sales for dollars, that would also help the euro zone by weakening the euro against the greenback, the sources said.
Bayer has investment-grade ratings from S&P, Moody's and Fitch, but all three agencies said they were reviewing their ratings for possible downgrades following the offer for Monsanto. We doubt that any downgrade will push the pharmaceutical giant into junk status.
And here is the punchline: once Bayer acquires Monsanto, a substantial number of the company's highly-paid 22,500 workers will be "synergized" rinto into unemployment. Only this time we will know who is directly to blame for thousands of American workers losing their jobs: the European Central Bank.