Corporate Finance: Merger Funding Lifts Borrowing Activity


Companies borrowed 17.3% more in the US bond market in the first half of 2006 than they did in the same period a year earlier, despite higher interest rates this year, according to the Bond Market Association. US companies stepped up their debt issuance to fund an ongoing wave of mergers and acquisitions and share-repurchase activity, as well as increased capital investment, the association says.

Gross corporate bond issuance totaled $421.4 billion in the first six months of this year, up from $359.4 billion in the first half of 2005. Net new issuance has accounted for much of the growth in corporate borrowing this year, a reversal of recent trends, when most of the supply coming to market was the result of refinancing existing debt, according to the associations latest quarterly research report. Surprisingly, issuance of mortgage-related securities rose 16.6% in the first half of this year, as consumers continued to take out new home mortgages and refinance existing mortgages, even though long-term interest rates rose.

The association forecasts that bond issuance will continue to climb during the remainder of 2006. The US economy should continue to expand this year, although at a subdued pace, with business spending leading the way, it says.

Investor demand for longer-maturing assets and market confidence in the Federal Reserve will work together to keep interest rates in check, says Michael Decker, senior vice president and head of research and policy at the association. This, in turn, will help generate issuance growth, especially in high-quality sectors and among issuers looking for new funding rather than refinancing, he says.

Even taking into account corporate cash positions built up during the profit boom, issuance of debt should remain strong for the balance of the year, Decker says. Capital spending has been running ahead of internally generated cash flow.


Merrill Lynch says the dollar volume of mergers and acquisitions financed by high-yield debt securities is at the highest level ever in its data series, which goes back more than 20 years. High-yield debt issuance in the US market fell sharply in July, however, to only $3 billion from more than $14.8 billion in June, according to Montpelier, Vermont-based KDP Investment Advisors.

The biggest high-yield issue in July was by Milwaukee, Wisconsin-based Rexnord, which is a subsidiary of RBS Global. The company sold $485 million of senior notes due in 2014 and $300 million of senior subordinated notes due in 2016 in a private placement.

The proceeds of the offering, together with an equity investment by an affiliate of Apollo Management and borrowings under new senior secured credit facilities, will be used to finance Apollos purchase of RBS Global from The Carlyle Group, a Washington, D.C.-based global private equity firm. New York-based Apollo is also a private equity firm. The $1.8 billion purchase of RBS Global, a manufacturer of power transmission components and conveying equipment, was announced in May and is expected to close in the third quarter.

Carlyle bought Rexnord from UK engineering company Invensys for approximately $880 million in the second half of 2002. In April of this year, Rexnord agreed to buy Falk, a Milwaukee-based maker of gears and couplings, from Hamilton Sundstrand for $295 million.

Issuer Offer Date Coupon % Issue Type Maturity Date Private/Public Amount ($millon)
NTL Cable 7/18/06 9.125 Senior Notes 8/15/16 Public 550
Rexnord 7 /14 /06 9.500 Senior Notes 8/1/14 144A 485
Verso Paper Holdings 7/26/06 9.125 Senior Notes

(2nd Priority)

8/1/14 144A 350
Verso Paper 7/26/06 11.375 Sr.Sub.Notes 8/1/16 144A 300
Rexnord 7/14/06 11.750 Sr.Sub.Notes 8/1/16 144A 300
H&E; Equipment Services 7/28/06 8.375 Senior Notes 7/15/16 144A 250
Verso Paper Holdings 7/26/06 Floating-rate Notes 8/1/14 144A 250
Mobile Services Group 7/20/06 9.750 Senior Notes 8/1/14 144A 200
Iron Mountain 7/12/06 8.750 Sr.Sub.Notes 7/15/18 144A 200
Penhall International 7/18/06 12.000 Senior Notes

(Sec., 2nd Priority)

8/1/14 144A 175
Phibro Animal Health 7/27/06 10.000 Senior Notes 8/1/13 144A 160
Digicel 7/18/06 9.250 Senior Notes 9/2/12 144A 150
Petrohawk Energy 7/24/06 9.125 Senior Notes 7/15/13 144A 125

Source: KDP Investment Advisors

Gordon Platt