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Thursday, 23 November 2017

US Bond House: Bank of America Merrill Lynch

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Safe pair of hands

Investment-grade bond issuance in the US set another record in 2015 of well over US$1.2trn, driven by massive M&A and share buybacks as companies locked in cheap financing before rates finally begin to rise. For being a leader on some of the biggest of those deals, and navigating massive headwinds at the same time, Bank of America Merrill Lynch is IFR’s US Bond House of the Year.

The themes that dominated the US bond market in 2015 were the massive resurgence of M&A, the billions of dollars of investment-grade bonds that financed those acquisitions and the intense volatility that banks had to navigate along the way.

Having a safe pair of hands to steer companies through the ups and downs was crucial, as spreads blew out to three-year wides – and Bank of America Merrill Lynch was at the forefront of many of the biggest and most challenging bond sales.

In a year that saw a record US$4.2trn of M&A announced, BAML was a lead on four of the five largest M&A bond deals: AT&T, Medtronic, AbbVie and Charter Communications.

The bank was also bookrunner on some of the trickiest acquisition financings, including for companies such as Halliburton and Southwestern Energy in the choppy oil sector.

As liquidity became a greater concern, investors clearly showed a preference for larger deals, and without a doubt 2015 was truly the year of the jumbo. There were only three investment-grade deals sized at US$10bn or larger in both 2013 and 2014; this IFR Awards year there were 14 of them, all intended for either M&A or shareholder-friendly measures such as share buybacks.

But that didn’t mean the sales were a simple slam dunk. A number of events caused havoc in the markets: oil price volatility, worries about Chinese growth, Greece’s debt woes and the seemingly unending uncertainty about whether the Fed would hike rates or not.

Yet as far back as December 2014, when IFR’s awards season was under way, BAML – under the leadership of co-heads of Americas investment-grade capital markets, Brendan Hanley and Andrew Karp – was already blazing its trail to the US Bond House of the Year.

Mindful of the huge M&A pipeline about to be unleashed once the new year began, BAML was one of the banks on the US$17bn seven-tranche issue for medical device maker Medtronic. The trade at one point was expected to be less than US$3bn, and ended up becoming the largest investment-grade bond of 2014.

The company’s debt financing needs for its US$43bn acquisition of Covidien skyrocketed after the US government closed the loophole on so-called tax-inversion M&A trades – a move that increased the cash portion of the financing to US$16bn.

To offset concerns about higher leverage and subsequent credit rating downgrades, Medtronic offered juicier new issue concessions of about 15bp–20bp.

Though high at the time, that plump spread allowed the company to attract some US$45bn in demand, lock in cheap rates on long-term debt and keep refi risks in balance: US$12.5bn of the bonds, accounting for 73.5% of the deal, carried maturities of 10 years or more.

When to say when

BAML had plenty of other standout issues as well: the US$17.5bn bond for AT&T that financed its US$48.5bn purchase of DirecTV; the US$16.7bn deal for AbbVie to help fund the pharma giant’s acquisition of Pharmacyclics; and the highly structured US$15.5bn trade for Charter Communications – a vital part of the financing backing its headline acquisition of Time Warner Cable.

AT&T’s deal in late April came as demand for high-grade was reaching fever-pitch – and just before spreads really started to come under pressure.

Not only was it able to price the transaction with minimal concessions, but the red-hot market also enabled it to insert a clause leaving three of the tranches outstanding even if the M&A deal didn’t go ahead – a savvy move that left AT&T with cheap, long-term debt whatever the outcome of the acquisition.

BAML also showed it was on top form in getting deals done when the moment was right.

One such deal was the US$10bn debut from chipmaker Qualcomm. The bonds, which financed share buybacks, were priced in mid-May and weakened within a couple of months after reports that the company was considering a break-up.

That risk was well known to investors when the debt was raised. But BAML, one of three bookrunners on the trade, smartly spotted the window to issue, picking a time when the buyside was less leery of activist threats to split up the business.

In September, BAML helped reopen the high-grade market with a US$10bn share buyback trade for Gilead Sciences – the biggest high-grade deal in almost two months, and the first to be priced for almost three weeks following a late-summer freeze in the debt capital markets.

The next month – after the high-grade market had been battered by weeks of fund outflows, along with rates worries after the Fed had held fire yet again – BAML was one of three banks on a US$13bn issue for Triple A rated Microsoft.

With that trade, Microsoft became the only company ever to sell two bond deals of US$10bn or more in any one year.

In the high-yield market, meanwhile, BAML helped restore confidence in October when it priced a US$300m issue for Scotts Miracle-Gro. That trade ended an eight-day hiatus in the primary market after a sharp repricing of risk.

Shortly after that, the bank was left-lead on a US$3.4bn eight-year non-call three issue for payment technology company First Data – a deal rated Triple C by Moody’s that was quadrupled in size, allowing the issuer to save US$150m–$200m in annual interest payments by using proceeds to take out expensive debt.

Timed just after the company’s IPO, the deal was one of the largest one-day upsizings in the high-yield market since the financial crisis.

Getting it done

Bond sales for Southwestern Energy and Halliburton were also tricky – sizeable issues at US$2.2bn and US$7.5bn respectively in a sector that was plagued by the slump in oil prices.

Southwestern’s deal, part of a broader package to pay for its acquisition of assets from Chesapeake Energy, was one of the toughest acquisition financings of the year.

Though the company didn’t raise as much as it had intended, the bond helped set a benchmark for lower-rated issuers. It included a 25bp step-up in the coupon for every notch downgrade below investment grade.

“There’s been a lot of talk that step-up language would come into play on low-rated, investment-grade energy companies,” one credit strategist told IFR at the time. “But Southwestern’s deal shows that this is a way to get investors back into the market and become involved in new issuance.”

BAML’s deft performance translated well into market share. The bank was second in the high-yield league table with a more than 9% market share, and it was also a top-five player in the consumer ABS market, winning an 8.1% share of the US$164bn of deals sold as of mid-November.

To top it off, BAML served as the left-lead on Ford Motor’s US$1.05bn prime auto ABS deal in September.

It was the only ABS deal to price in compliance with new rules for loan-level and reporting disclosures under so-called Regulation AB II before that regulation came into effect on November 23. Bank of America Merrill Lynch, as it was all year, had been ahead of the curve yet again.

To see the digital version of the IFR Americas Review of the Year, please click here .

To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com .

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