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* Euro corporate bond market gears up for bumper H2
* More hybrid deals expected
* M&A borrowers face leverage risks
By Laura Benitez
August 8 (IFR) - The European corporate bond market isexpected to reload early after the summer break and is gearingup for a bumper second half of the year as issuers keen torefinance M&A bridge loans prepare to tap the market.
Debt capital markets bankers have been hoping for some timefor a pick-up in M&A activity to bolster primary bond marketvolumes and it looks as if their hopes are finally coming truein 2014.
According to Thomson Reuters data, year-to-date global M&Aactivity totals US$2.2trn, up 66% from the same period lastyear, while July's total of US$428.5bn is the highest monthlylevel since 2007.
"We're going to see more activity in the European investmentbond market coming from the increase in M&A financing; it'sdefinitely shaping up to be a busy September," said a syndicatebanker, who added that the market had plenty of capacity toabsorb extra supply.
A head of syndicate echoed this view, adding that he wasworking on eight upcoming M&A-related bond issues. There iscurrently 63.2bn worth of European bridge loans due to maturebefore the end of 2015, while European leveraged syndicatedvolume year to date stands at 85.5bn, according to ThomsonReuters data.
Increased M&A activity partly stems from the wave ofso-called tax inversion driven deals that have flooded the M&Amarket over recent months. Companies have been eagerlyapproaching targets ahead of new US tax rules that are expectedto come into play on January 1 2015.
The rules will restrict companies from inverting: a methodwhere businesses are restructured abroad to adopt new taxjurisdictions for 20% of the combined entity's stock.
"It makes sense for those US companies that have globaloperations and a mid-level investment grade and Europeanprofile, and those with chunky funding size requirements totarget European investors. Some of these deals will be as largeas US$20bn, while others are much smaller at US$5bn," the headof syndicate said.
The European corporate bond market has so far coped wellwith an increase in supply and volumes year to date are ahead oflast year's, at more than 169.8bn-equivalent compared to the140.1bn according to Thomson Reuters data.
BIGGER, BOLDER
Corporates are expected to use every available tool in thetreasurer's tool box, with hybrids making up an important partof the financing mix, according to market participants.
Already, the volume of hybrid bonds issued so far this yeartotals more than 27bn-equivalent, compared to 25.4bn-equivalent in the same period last year, according to ThomsonReuters data.
One syndicate banker said the corporate bond market isundergoing a change in dynamic, in which subordinated and hybriddeals are becoming a standardised product with moreintraday-executed transactions being seen.
"It's changed the landscape for hybrid deals. We'll beseeing low-beta names issuing these deals in the near future,and they will attract investors chasing bigger yields and moreflexible tenors and ratings," he said.
Meanwhile, dual-tranche deals, especially from the biggernames that have been spurred on by increased risk appetite, arealso expected.
LEVERAGING UP
However, while the market appears to be firing on allcylinders, the increase in M&A is not without risks.
"While the overall leverage ratios remain in check, the sizeof deals and consequent aggregate borrowing has been increasing,and this is a trend that we expect to see continue," saidanalysts at Henderson.
"Borrowers are also being more innovative in how they usedebt to fund deals, with the use of term loans to pre-financesmaller deals entirely rather than requiring costly bridgeloans, while on larger deals we see far more use of bond dealswith tranches across multiple currencies."
In a note published at the end of July, S&P warned thatwhile acquisitions in this cycle had been generally supportivefor credit quality, rising leverage levels could change thisfeature of the M&A rebound in Europe.
Meanwhile, a number of corporates have either already beendowngraded or put on negative outlook. Fitch downgraded Vodafoneto BBB+ from A- in early August, citing the increase in leverageresulting from the acquisition of 100% of the share capital ofONO.
GlaxoSmithKline is another example of a corporate being hitby a downgrade because of M&A. The issuer's A1 Moody's ratingwas moved to A2 in early August, partly because of the "materialcontingent liability arising from a put option granted toNovartis as part of a three-leg M&A transaction signed earlierthis year," the agency said in a statement.
British Sky Broadcasting Group's BBB+ Fitch rating could becut by two notches if its acquisition of 100% of Sky Italia and a 57.4% stake in Sky Deutschland from 21st Century Fox goesahead. (Reporting By Laura Benitez, Editing by Helene Durand andPhilip Wright)
