Merger activity remains robust; impact mixed for bonds
admin | September 28, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The financials sector has led global growth in merger and acquisitions this year, with bank activity stronger as regulatory frictions have eased. Equity markets have reacted negatively on occasion, which can have repercussions for debt holders. We generally view such deals as credit neutral for banks and insurance issuers given regulatory limits on leverage and capital ratios.
Global M&A activity led by financials
Global M&A activity as measured by value is up 9.1% globally and up 27% in North America. The financials sector has led other industries year-to-date with deal volume of $930 billion, up 18% versus the year-earlier period. Among financial firms that have been the most active are real estate companies (↓ 3% @ $278 billion year-to-date) and REITs (↑ 124% @ $196 billion year-to-date). Remarkably, global M&A among banks is up 63% for the period with $124 billion of deals, which contrasts with years prior when regulatory friction was greater.
We expect insurers and asset managers will remain acquisitive as they look to scale-up efficiencies to overcome the stubbornly tight margins. There have been some notable insurance company acquisitions that have helped drive 20% higher volume over last year. In August, Hartford (HIG: Baa1/BBB+/wd) announced it will acquire Navigators Group for $2.1 billion in an all-cash deal. HIG said it has sufficient financial resources to pay for the deal on its own, but will explore debt capital markets funding (no equity) before the closing of the deal. HIG only has $4.2 billion of corporate bonds out, so a sizable issuance could put some weight on spreads. At the time of the announcement HIG shares traded off nearly 4% on the day, which highlights the risks for even seemingly positive deals. The negative consideration for bondholders is primarily the negative technicals, though execution risk over the long-term is potentially more meaningful.
While we do not expect any mega-deals among the large, systemically important banks, we expect there will be select activity among smaller regional and community banks. However, the prospect of an unfavorable equity market reaction – which occurred after Fifth Third announced it would acquire MB Financial in May, and when Synovus announced its acquisition of FCB Financial in July – may weigh on spreads for an acquisitive bank. Despite the negative reaction in the equity markets in some instances, we view such deals as generally credit-neutral for banks or insurance issuers given regulatory limits on leverage and capital ratios.
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