Credit Markets’ Spring Awakening May Help Mergers

Posted by Heidi N. Moore at Deal Journal, WSJ.com:
While much of the country languishes in a post-New Year’s, dead-of-winter coma, it feels like spring in the corporate debt market–spring 2008, that is.
The collapse of Bear Stearns in March 2008 froze the credit markets. It is only now, after several more companies went under, a $700 billion bailout was put in place and the auto industry was saved, that companies have been able to find buyers for their debt in the public markets in any appreciable number.
This week already is the best week for corporate debt sales since May 18, 2008, with proceeds totaling $19.9 billion, according to Thomson Reuters, though it still doesn’t match the $33.1 billion of that week in May. The second quarter of 2008 was a record for the debt markets as companies paid banks $5.5 billion in fees in just three months, according to Dealogic data.
The biggest debt issuance this week comes courtesy of a big takeover: InBev’s acquisition of Anheuser-Busch. Anheuser-Busch Inbev, rated BBB+, raised nearly $5 billion Wednesday, according to Thomson Reuters.
In addition, junk-rated Cablevision Systems Corp.’s CSC Holdings Inc. launched the first junk bond offering of the year Thursday and is expected to sell $500 million of bonds in the afternoon at a discounted price to yield 11% or more.
For banks, this is good news on two fronts. Most obviously, they can start making money by selling debt on the markets. Banks took a big hit as that business evaporated last year. Debt capital markets generated revenue of $13.6 billion in 2008, down 38% from 2007. Investment grade issuance earned banks $5.9 billion in fees–for the whole year–down 21% from 2007, while high yield issuance earned banks $1.0 billion in fees, down 69%, Dealogic reported.
InBev’s creditworthiness surely helped, as highly rated companies come back to the markets. Credit-worthy issuers with AAA ratings accounted for $6.7 billion of this week’s issuance, the highest level since the week of April 13, 2008. The good news there is that it means that nearly two-thirds of this week’s issuance, or $13.2 billion, comes from companies that aren’t necessarily the highest-rated. That signals that the gates on the credit markets may finally be starting to open.
One sector that stands to benefit from an ability to sell debt is the pharmaceutical industry, which appears poised for a wave of mergers. Pfizer and Merck have both indicated they are searching for companies to buy. Generics giant Actavis appears headed for the auction block according to our brother Health Blog, and its potential buyers include Big Pharma players Pfizer, Sanofi-Aventis, Novartis and GlaxoSmithKline.