Lenders bank on IG M&A revivalInvestment-grade loan M&A activity has rallied since the beginning of the year, driven by the Federal Reserve's anticipated reduction of interest rates, which has led to a banking market that appears to be more receptive to deploying capital. Banks are signalling an increased appetite for lending. Last year, they approached new money deals cautiously due to their own cost of capital concerns, but now a change in mindset is encouraging corporates to think more acquisitively. "I do expect M&A to be busy this year. The bank appetite is there, and I think there is still a competitive and aggressive nature in the bank market. Banks are competing to the extent that we've seen term loans agreed for acquisitions when a bridge loan would have provided a better immediate fee return," said a banker, citing a US$10bn delayed draw term loan arranged for pharmaceutical firm Bristol Myers Squibb in February that supports its M&A ambitions. "That deal was announced without the need for committed financing. Then, to put some backstop financing in place, they did a DDTL, and banks were willing to agree to that [on the assumption they would win the resulting] bond business." On February 14, BMS issued US$13bn of bonds to partially finance its US$14bn acquisition of Karuna Therapeutics and US$4.1bn purchase of RayzeBio. Underwriters on the bond issue, Citigroup, Bank of America, Wells Fargo and Mizuho, also led the DDTL. A receptive bond market is also boosting loan bankers' confidence that their M&A debt exposure will be taken out rapidly. "If you look at the strength, volume and supply that's been able to go through the high-grade fixed-income market this year, I think the confidence borrowers have in that has taken the need for hard bridges a little bit off the table because they're so confident that they can get to the bond market and get their deal done," said a second banker. According to IFR data, US investment-grade bond issuance totalled US$396bn in the first two months, up from US$299bn in 2023. Comeback kings Large M&A loans for oil and gas company Diamondback Energy to support its US$26bn acquisition of Endeavor Energy Partners and for building materials manufacturer Owens Corning to back its US$3.9bn purchase of Masonite International have contributed to the sense of optimism among lenders. In February, Diamondback placed US$8bn of bridge loans via Citigroup to back the acquisition, followed this month by US$1.5bn of delayed draw term loans. Morgan Stanley provided a US$3bn 364-day DDTL to Owens Corning in March. Improving conditions come on the back of a muted period for M&A loans. Investment-grade M&A loan volume totalled US$120.3bn last year – a 20% fall from 2022 and the lowest since 2020. Only nine of those M&A transactions included loan financings of US$5bn or greater, as borrowers worried about doing large, transformative deals in a rising interest rate environment. For the first two months of this year, M&A loans amounted to US$20bn, accounting for 17% of January and February's combined investment-grade loan issuance of US$116bn. "We've seen a pickup this year, especially in the energy and healthcare sectors," said another senior banker. "There is a sense that there's momentum behind it, and if that's the case, what we've seen so far would suggest the rest of the year should be strong." Regulatory snag One potential fly in the ointment for larger M&A deals comes from regulatory barriers. There has already been a high-profile casualty: in February, the US Federal Trade Commission sued to block Kroger's proposed US$24.6bn acquisition of supermarket company Albertsons on competition grounds. The Albertsons buy was initially backed by a US$17.4bn bridge loan, which in November was reduced to US$12.65bn following the signing of US$4.75bn of delayed draw term loans. There are other potential stumbling blocks. "The big uncertainties are the [US presidential] election [in November] and
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