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Article18 Oct 2021

M&A and the Threat to Corporate Credit

How much of a threat to corporate credit is M&A activity? It is a frequent question given that M&A is the most volatile component of the many discretionary decisions companies make. These decisions determine whether companies end up taking on, or repaying, debt. Citi Research’s Hans Lorenzen looked at the implications of the M&A boom for European high-grade credit, and we crystallize some of his key conclusions.

M&A activity is certainly rising sharply. The number of announced $1billion plus transactions with a European component (buyer, seller or target) is higher than ever. The volume of completed deals is still some way from historic highs, but with more than €425bn of pending deals and €180bn of proposed deals in 2021, Citi analysts reckon it will likely hit a post-GFC high over the coming months. A recent softening in the macro backdrop notwithstanding, the incentive to make more acquisitions going into 2022 remains strong.  

Citi analysts reckon that the bad news from a credit investment perspective largely ends there. 

 ● Firstthey find that, to date, non-financial companies, responsible for the bulk of the pick-up, have mostly been making comparatively small acquisitions with a lower than average share that is purely debt/cash funded.  

● Second, acquirers tend to be strongly rated entities and the rating impact of acquisitions in 2020 and 2021 has been almost neutral.  

● Third, even if companies were to get more aggressive, history suggests that the rating migration that can be directly attributed to M&A is too small to matter much for the broader investment-grade universe.  

Non-financial acquirers’ share prices struggle… 
Share of acquirers seeing absolute share price performance* 

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Source: Citi Research, Bloomberg. *: Percentage of acquiring companies over 
a 12m rolling window that see the share price increase 3 months from announcement date.  

Private equity acquisitions have also increased substantially. While there is little doubt they have the capacity to impact credit quality in € IG, the pattern of their track record over the last three years clearly shows that the vast majority of their activity is concentrated in businesses that are simply too small to enter the investment-grade market. The Citi report states the view that LBO risk is idiosyncratic, not systemic.  

Taken together, Citi analysts said they struggled to find persuasive evidence of any notable linkages between the wave of M&A and credit spreads. What they do find, perhaps not surprisingly, is a strong link from M&A volumes to subsequent net issuance. The extraordinary volumes of cash that companies have on balance sheets and funding in other currencies may diminish that link temporarily. But if sustained over the course of 2022, M&A may well be what assuages the dearth of issuance over the last year. For more information on this subject, please see European High-Grade Credit Strategy - Is M&A a threat to tight credit spreads?* first published on September 28. 

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here. 

 

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