Momentous and monumental M&A issuance soothes nerves in uncertain environment.
When brewing giant AB InBev began marketing the mega-bond backing its acquisition of SABMiller in early January 2016, the high-grade market had got off to its rockiest start in years.
Stress in the credit market was sky high as worries about China, commodities and other headline risk put the primary market in uncertain mood – even on the heels of a record US$1.269trn of issuance in 2015.
Pulling the deal off was not just crucial for AB InBev but also for the hoards of other companies that had to follow in its wake to sell debt to finance M&A.
But pull it off the brewer did.
The drinks giant behind Stella Artois, Budweiser and Corona sold a US$46bn seven-tranche bond – the second largest corporate deal of all time, just shy of Verizon’s record-breaking US$49bn issue in 2013, and also bigger than the US$40bn many had expected.
As investors piled in, AB InBev managed to etch itself into the record books with a US$110bn order book, the largest ever seen on a corporate deal.
“It is the perfect name and sector for a volatile market,” one banker said at the time. “Look at the financial crisis: people were drinking more beer than ever before.”
Still, pulling off a deal of such magnitude was a mammoth task. The company had a record US$75bn syndicated loan in place, and taking that out with bonds was a priority.
Market conditions during the two-day bookbuilding process were not ideal.
As the bond launched, the Dow Jones Industrial Average sank 365 points. Yet investors barely blinked an eye, and the issuer still only paid new issue concessions ranging between negative 5bp and plus 20bp after pulling in pricing by 15bp–35bp.
As the bonds widened on their first day of trading, the timing of the trade looked even more spectacular – at least from the issuer’s point of view.
One debt capital markets banker close to the transaction tipped his hat to private equity firm 3G – run by some of AB InBev’s controlling shareholders – for the timing of the financing, which landed months before the acquisition was due to close and bypassed even rockier conditions weeks later.
“They always want to take all the risk off the table and hit the market when they can,” said the DCM banker of 3G. “We told them they could go and they didn’t flinch; they don’t care about the negative carry.”
Last orders
AB InBev also sold bonds with maturities as long as 20 and 30 years, a brave move given that most other high-grade companies in prior weeks had mostly stuck to defensive tenors of 10 years and under as volatility reared its head.
In fact, more than half the debt – some US$28bn – was dated 10 years and longer and all came with interest payments of less than 5%. Not a bad result for a company with more than five times leverage, according to ratings agencies.
To be sure, the AB InBev company (A3/A–) had a good track record on its side.
Formed in 2008, when Anheuser-Busch merged with InBev, it had stuck to its promise to delever, and in doing so made the new debt-raising that little bit more palatable for investors.
And even though its dollar bonds fell victim to market volatility in the days and weeks after their launch – they widened considerably as global financial markets sold off – they had recovered in time for the launch of the company’s record-breaking euro deal in March.
The issuer’s €13.25bn outing easily became the biggest bond in euros – ahead of Roche’s €11.25bn deal – and was more than double the size the market had anticipated.
And it hit the market just days after the European Central Bank shocked the market with its plans to buy more corporate bonds that prompted a frenzy of new issuance and rally in spreads – once again, perfect timing from AB InBev.
That deal also marked a return of demand for long-dated paper. The more than €31bn book was heavily skewed towards the longest dated 12 and 20 years bonds – the latter of which was the first in euros in almost a year.
BNP Paribas, Deutsche Bank, ING and Santander were global coordinators on the euro deal, together with active bookrunners Banca IMI, Mizuho and Rabobank.
To top it off, AB InBev squeezed in a US$1.47bn 30-year Formosa transaction in between the euro and dollar trades. The deal, led by Deutsche Bank Taipei, was the first from a non-bank issuer of the year in Taiwan.
The banks that led the various issues were surely pleased with their success, but not only from the point of kudos. On the US dollar deal, global coordinators Bank of America Merrill Lynch, Barclays and Deutsche Bank and joint bookrunners Mitsubishi UFJ, Santander and Societe Generale were in line to share US$200m–$250m in fees, according to fee tracker Freeman & Co.
They – and other banks – also held the deal up as an example on how to handle market volatility. It swayed other issuers to bring forward M&A financings after spreads recovered from multi-year wides in February, in an effort to avoid potential market upheavals that some fear might surface in the second half.
“If you are a large-cap company looking at an acquisition that involves a massive amount of debt financing, this successful InBev transaction would give a lot of comfort,” said a senior banker close to the US dollar deal.
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