Corporate Finance : Wave of Mergers Triggers Rise in Bond Issuance

Corporate Debt

The recent increase in worldwide mergers and acquisitions is resulting in a rise in large corporate bond issues to raise money to help pay for the takeovers and to take advantage of low long-term interest rates.

Global corporate debt volume rose 14% to $216 billion in January from $189.5 billion in January 2005, according to Dealogic. Issuance in the US high-yield bond market rose 38% to $13.5 billion in January from $9.8 billion in December 2005, says Montpelier, Vermont-based KDP Investment Advisors.

Redwood Shores, California-based Oracle sold $5.75 billion of investment-grade debt in one of the biggest bond offerings ever by a technology company. The software company raised the money in January to pay for its acquisition of Siebel Systems, a customer-relationship services provider based in San Mateo, California.

Teva Pharmaceutical Industries, based in Israel, sold $2.75 billion of debt securities, including debentures convertible into American depositary receipts. The company sold $1.5 billion of senior notes in two series maturing in 2016 and 2036, as well as $750 million of convertible senior debentures maturing in 2026, which may be redeemed by Tevas finance subsidiary in five years. The debentures also may be repurchased by Teva at the investors option in five, 10 or 15 years. Teva also offered $500 million of convertible senior debentures maturing in 2026, which may be redeemed in two years and repurchased by the finance subsidiary at the investors option in two, five, 10 or 15 years. Proceeds of the issues will be used to finance Tevas acquisition of Miami, Florida-based IVAX, a rival generic-drug manufacturer

In the US high-yield market, power producer NRG Energy, based in Princeton, New Jersey, sold $3.6 billion in bonds to help pay for its acquisition of Texas Genco, a Houston, Texas-based power generator. The issue was the second-largest high-yield bond sale ever, following the record $6.1 billion issue in 1989 for Kohlberg Kravis Roberts leveraged buyout of RJR Nabisco.

R.H. Donnelley, a Yellow Pages directory publisher based in Cary, North Carolina, sold senior notes generating proceeds of approximately $2.1 billion in a three-part sale in late January, in part to pay for its acquisition of Dex Media, an Englewood, Colorado-based publisher of telephone directories.

In one debt issue that was not merger-related, EchoStar DBS, a subsidiary of EchoStar Communications, which has more than 12 million satellite TV customers for its DISH Network, sold $1.5 billion of senior notes in the US high-yield market. The proceeds of the 10-year notes will be used to redeem an outstanding issue to obtain a lower borrowing cost, as well as for general corporate purposes.

Even though credit fundamentals remain benevolent at this late stage of the credit cycle, the roster of issuers expected to benefit from potential upgrades [in their credit ratings] will diminish over time, says Diane Vazza, head of Standard & Poors global fixed-income research group. Factors that are supportive of potential upgrade momentum are weakening from peak levels, she says.

Credit spreads will creep higher in the next 12 months as markets re-price risk, Vazza forecasts. The pickup in debt-financed mergers and acquisitions could constrain credit-quality improvement and serves as an early warning signal of rising default pressure in 2006 and beyond, she says.


Gordon Platt