Though financing for leveraged deals is getting trickier, the pace of merger and acquisition activity will remain brisk, a Goldman, Sachs & Co. investment banker told corporate treasurers this week.
Speaking to a session of the Treasury Management Association's annual conference here, John Townsend, co-head of Goldman's leveraged finance group, said the recent widening of spreads in the bank loan and high-yield bond markets has made it more expensive for corporations to fund acquisitions.
But to illustrate that highly leveraged deals can still get done, Mr. Townsend was joined by the chief financial officer of a high-yield energy company that completed an acquisition financing amid August's stock market turmoil.
Mr. Townsend told those at the conference that the balance of power in the bank loan market-which finances about 45% of leveraged acquisitions-has shifted in the last four months from borrowers to lenders. He said the trend has been fueled in large part by institutional investors pushing to sell their loan holdings. That depresses prices in the secondary market and hurts the loan market's liquidity.
"That's a very important trend right now," he said.
At the same time, fundamentals driving the M&A market remain strong, Mr. Townsend said. These include a belief among investors that acquisitions can help companies increase earnings and the proliferation of megadeals.
Another important force: leveraged buyout firms. They have raised more than $60 billion to invest in deals, Mr. Townsend said. Increasingly, these firms' rich war chests are enabling them to outbid strategic, corporate buyers of desirable acquisition targets, he said.
Against this backdrop, Mr. Townsend told treasurers that in some cases, an acquirer's ability to tap the market can be more important than the price it has to pay to do so.
"Sometimes the smart decision is not to be too aggressive in how you're going to access the market," Mr. Townsend said.
Mr. Townsend's partner in addressing the session, Maura Clark, chief financial officer of Clark Refining and Marketing Inc., offered a case in point. The company priced a $110 million high-yield issue Aug. 4-a day the Dow Jones industrial average fell 299 points.
"On the day of the pricing we thought about waiting," Ms. Clark said. "Thankfully, we didn't. If we waited, the pricing would have been awful" because the Dow continued to fall, causing the high-yield market to stall.
The 8.625% notes, which priced at 325 basis points over Treasuries, were the last high-yield securities to be issued for three months, Ms. Clark said. She said the experience taught her that holding out for the best price is not always prudent.
The proceeds of the issue, coupled with a $115 million term loan, enabled Clark to complete its $250 million acquisition of a refinery from British Petroleum. But Clark faced other difficulties besides a volatile market.
For one thing, in order to issue more debt, it had to get permission from current holders of its holding company's bonds. That proved more expensive than the company had hoped, Ms. Clark said.
The company also ran into trouble with a rating agency, which initially put the company on credit watch for a possible downgrading. The move was based on what Ms. Clark said were misunderstandings about the refinery acquisition.
But the company fought back and made a second presentation to the agency. "Telling the rating agency they are wrong is not an easy thing to do," Ms. Clark said. To help make its case, the company offered access to an independent consultant as well as to the seller, British Petroleum. Its ratings were reaffirmed.
