M&A activity powers debt markets post COVID

Published May 21, 2021

Merger and acquisition activity is gathering apace in 2021, fuelled by the low cost of capital and corporate willingness to purchase companies, rather than grow organically, according to ANZ’s capital-market experts.

“The big theme of 2021 is really M&A,” Gavin Chappell, Head of Loan Syndications, ANZ Institutional said on podcast. “We're seeing a lot of M&A activity around the globe and Australia, probably kick started that towards the end of last year.”

“I think the purchasing of growth is probably cheaper than building it and probably less risky as well,” he said, noting capital is “very cheap right now”.

“If I look back over my career, I would suggest that M&A volume at the moment or M&A activity that we're speaking to borrowers about is probably as strong as it's ever been.”

This M&A debt is then expected to be refinanced in the bond markets at a later stage.

“That will then come to the bond markets, but there’s typically a bit of delay in that,” Gwen Greenberg, Head of DCM Australia, ANZ Institutional said.

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Buoyant markets

The Australian bond market had a strong second half in 2020 after the initial disruption caused by the COVID-19 pandemic.

Corporate issuance only kicked off in May with Woolworths’ $A1 billion bond which ANZ was joined lead manager and the momentum has carried through to 2021.

“The Aussie [bond market] was probably for natural Aussie borrowers, the most competitive market in currency for volume and for tenors,” Greenberg said.

Corporate bond volumes  2021 year to date are around $A7.7 billion with just over half executed in the weeks before and after Easter as issuers looked to lock-in competitive pricing.

The Australian bond market has remained extremely competitive price compared to other capital markets.

“Credit had really come in quite significantly [from the end of 2020], on average around 40 basis points depending on the sector and the issuer,” Greenberg said.

But after the surge in primary issuance, investors have become more selective when looking at new deals.  This coinciding with issuers entering into their blackout periods has led to less activity, according to Greenberg.

Across institutional loan markets, volumes were softer last year after the initial surge with borrowers seeking incremental facilities for extra headroom due to the uncertainty of the pandemic.

As market conditions normalise, the surge in loan premiums last year has largely abated, Chappell said.

“That whole COVID premium is disappeared and we're back to normal from that perspective and the market is very, very competitive,” he said.

Seeking diversity

In current market conditions, bond issuers are continually seeking to diversify their investor base and funding requirements.

Issuers want to continue to diversify their funding requirements and they want to build a very strong investor base so that they're not confined to one market, according to Greenberg.

“They generally have access to a minimum of two capital markets,” she said.

The theme of diversifying is also a trend in the loan market, according to Chappell.

“I think the past 12 months has just reinforced the diversity argument about diversity of tenor, diversity of investor,” he said.

Investors in loan markets are also looking for more diversity of credit and are prepared to accept a lower return.

“Increasingly over the past couple of months, we're seeing more investors who want diversity of credit as well, prepared to take a slightly lower yield, not necessarily just purely targeting the high-yield spots in the loan market,” Chappell said.

Sharon Klyne is Associate Director, Communications, ANZ Institutional