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Sunday, 19 November 2017

US Loan House

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  • A winning strategy

A winning strategy: Bank of America Merrill Lynch shifted its focus away from relationship lending to blue-chip firms in order to boost its return on capital in 2012. For its vision, its commitment to M&A and its strategic realignment, Bank of America Merrill Lynch is IFR’s US Loan House of the Year.

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

When Bank of America Merrill Lynch – a North American colossus known for its extensive balance sheet and deep pockets – stepped back from leading roles in refinancings for large US household names in April, it marked a departure from the old model of relationship lending to America’s top companies towards a focus on increased profitability.

When a US bank the size of BofA Merrill makes such a shift in strategy, the market takes note. The move highlighted a major change in the high-grade lending market, as lenders started to analyse the future revenue streams that ancillary business would bring and exited or reduced commitments on loans for well-known companies in 2012.

“We have reduced the number of transactions that we’ve been looking at because we have been much more focused and heavily aligned towards our return on capital,” said Peter Hall, global head of investment-grade loans at BofA Merrill.

Regulatory changes starting in 2013 will begin to make it more expensive for banks to provide backstop facilities and all lenders are revising their business models accordingly – to focus on providing more lucrative drawn loans.

“We haven’t told a single client, ‘we don’t have capital for you because we don’t like you’,” Hall said. “We have told clients just the opposite: ‘we have more capital than you could ever use as long as we get paid for it’.”

Despite exiting some large refinancings of well-known names, the firm’s realignment proved to be beneficial in terms of revenues and left it unscathed in terms of league table presence. 

In terms of number of deals, BofA Merrill led the US bookrunner league table for the awards period with a total of 1,076 loans, and came second in terms of volume with US$250bn, or a 16.4% market share.

However, being more selective in terms of how the bank deploys its capital will not modify the value it puts on relationships and its bank loan lending franchise.

“If you boil it down, everything starts with the loan product,” said Hall. “That’s where the original relationships starts, and everything blossoms from there. If you can get in, give [the company] good advice, lend them the capital they need, provide the structuring advice, provide the terms that they need, provide the capital when needed on a strategic basis, other things come from that: treasury management, M&A, equity, loans and bonds.”

M&A leadership

In 2012 BofA Merrill dominated the M&A-related investment-grade space by leading or participating at a senior level on almost every large acquisition that was announced. United Health Group, Chicago Bridge & Iron, Walgreens, Anheuser-Busch InBev, Abbott Laboratories, Tyco International, Watson Pharmaceuticals, Sara Lee, URS, ConocoPhillips and PerkinElmer were some of the most notable examples.

For the awards period, the bank led the league table for US investment-grade M&A bookrunners with 34 deals and US$20.5bn in volume – a 24% market share.

“There have been very few strategic deals in the last 12 months in the investment-grade world that we have not been part of,” Hall said.

The successful syndication of Gilead Sciences’ US$10.7bn financing package in the winter of 2011 was a deal that set BofA Merrill apart from its peers. As lead arranger, the bank fully committed to the debt financing (alongside Barclays) that backed the drug manufacturer’s US$11bn acquisition of Pharmasset.

The financing included US$7.7bn in unsecured bridge loans, split between a US$3.7bn bridge-to-bond and a US$4bn cash bridge. The facilities also included US$3bn in longer-term financing that consisted of a US$750m 364-day revolver, a US$1.25bn five-year revolver and a US$1bn three-year term loan.

The deal was extremely challenging given the timing. The company’s original bank group consisted of mainly European banks, which declined to participate in the transaction as they were hurting amid mounting funding costs and were evaluating budgets for the following year.

To get around this, Gilead and its lead arrangers targeted new pockets of liquidity and found significant interest and support among Asian banks.

Another big M&A transaction for BofA Merrill was the US$2.2bn financing that backed metals firm Chicago Bridge & Iron’s acquisition of engineering company Shaw Group. The facility, which was also led by Credit Agricole, included a US$1bn four-year unsecured term loan, a US$400m five-year incremental unsecured revolving credit facility and a US$800m bridge loan that preceded a private placement issuance.

Both Gilead and CB&I featured an attractive term loan component that also played into BofA Merrill’s shift towards funded debt.

“We are absolutely looking to deploy smarter and better funded assets because the returns on funded assets are much greater than those on an unfunded committed revolver,” Hall said.

Leveraged muscle

BofA Merrill’s advisory skills and leadership extended to the lower end of the ratings spectrum in leveraged loans.

The bank led the US leveraged bookrunner league table by number of deals with a total of 591 for the awards period. The bank occupied the second spot in terms of volume with US$100bn with a 15.3% market share.

The bank spearheaded several marquee refinancing transactions, including standout deals for communications firms Level 3 Communications and Intelsat Jackson, as well as oil and gas concern Samson Investments.

Intelsat Jackson tapped the market in September with a US$3.72bn refinancing, led by BofA Merrill, with Credit Suisse and JP Morgan. Also in September, BofA Merrill launched a US$1.2bn refinancing loan for Level 3, while the bank also helped Samson Investment to cut pricing on its US$1bn term loan.

“For Double B companies it’s just a really deep well,” said AJ Murphy, co-head of global leveraged finance at BofA Merrill. “And having a real strong institutional understanding of what banks will or will not buy, what their pressure points are, when they are going to buy, what they’re looking for. We know that cold. It’s really our bread and butter.”

BofA Merrill led the US$5bn cross-border financing that backed the combination of Lawson Software and Infor Global Solutions.

This was a huge loan for a highly leveraged B2 rated name, so BofA Merrill needed to figure out how to raise as much money as possible from the market. In the end, it managed to do so by structuring the deal with a six-year term loan, a euro carve-out and a CLO tranche – a US$400m 4.5-year facility that catered to CLO demand.

BofA Merrill benefited from its volume and depth in the leveraged market, which boosted the bank’s credibility with loan investors.

“One thing that helps us is that we are dealing with the market so frequently that they need to work with us, and us with them, and we also know exactly what they are up to,” Murphy said. “We know exactly when they do or don’t have money or what they are saving their money for. We have great communication with the market and that is of great benefits to our issuers.”

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