REFINANCINGS helped bolster European loan volumes in 2024 but with mergers and acquisitions looking like they’re finally picking up, bankers believe the tide is finally turning for bridge financings.
Lower European interest rates, tight bond spreads, more agreement on valuations between sellers and buyers and a US president that’s friendly to Wall Street are some of the reasons why deals are expected to increase next year.
“We are preparing for a busier year of M&A next year, 2023 was the low point for M&A and 2024 has shown there is appetite for deals,” said Nicolas Rabier, co-head of IG finance and loan capital markets EMEA at BNP Paribas. “There are ongoing discussions and large borrowers have the capacity for acquisitions.”
About US$40 billion worth of M&A transactions were announced globally on Monday (Dec 8), according to data compiled by Bloomberg. Snacks and sweets company Mondelez International is exploring an acquisition of US chocolate maker Hershey. Meanwhile, bankers are working on raising debt financing of around 9 billion euros (S$13 billion) for Unilever’s ice cream business, while French media conglomerate Vivendi got approval to spinoff three multi-billion euro units next week, among others.
At 340 billion euros, it would seem that EMEA investment-grade loans’ volumes are out of the doldrums, increasing by around 8 per cent versus last year. Yet, not only have the number of deals fallen by almost 13 per cent, according to data compiled by Bloomberg, but volumes are still way off 2022 levels.
For banks, the scale of M&A deals is a boon given that it’s new lending and it can be sizable. The biggest loan deal of the year came from DSV A/S for example. The bridge of around 14 billion euros helped finance its buyout of DB Schenker, the data show. The company has since raised 5 billion euros in equity and sold 5 billion euros in bonds to replace part of it.
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While they wait for the M&A machine to bring a wave of large deals, banks are leaning on their close relationships and replacing loans to support volumes. Mercedes-Benz Group and LVMH Moet Hennessy Louis Vuitton’s refinancings were second- and third- largest loans of the year, for instance.
Added to this were refinancing of facilities corporates took out in 2020 to support their liquidity.
“Most of the volumes this year have been a refinancing wave of loan facilities taken out during or post covid that had been extended until now, and this has been an attractive market to tap,” said LBBW’s head of syndicated loans Karsten Gross.
Fierce competition
Still, lenders are facing fierce competition from a red-hot bond market, which is offering some of the tightest spreads seen since early 2022. And more stringent regulation can make it harder for banks to extend balance sheet, potentially pushing corporates away from the loan market.
“Relative value has swung in favour of firms issuing bonds rather than loans today,” Barnaby Martin, European credit strategist at Bank of America, wrote in an outlook report. “In fact, it is common for bond yields to initially fall faster than loan yields, at the start of a cutting cycle.”
“With the recent Draghi Report on European competitiveness highlighting the over-reliance of European firms on loan financing, vis-à-vis bond financing, we expect a steady stream of firms opting to reduce loan funding in preference for bond funding,” Martin wrote. BLOOMBERG
