US: Higher-rated issuers willing to take on more debt for acquisitions
Higher-rated US corporate issuers may be more willing than lower-rated peers to take on large amounts of debt for acquisitions, with maintaining an investment-grade rating likely to be a common goal of borderline investment-grade rated acquirers, says Fitch Rating. The credit effect of large increases in leverage will typically outweigh the business profile benefits of M&A and lead to rating downgrades.
Our special report, U.S. Corporate Mergers & Acquisitions (Higher-Rated Issuers Willing to Take on More Debt for Acquisitions), includes look-back analyses on 23 large acquisitions across the industrials, consumer, healthcare, energy, utilities, real estate and technology, media and telecommunications sectors.
In addition to key takeaways, the report includes one-page tear sheets describing the transaction, targeted synergies, post- and pre-merger leverage sensitivities, and Fitch’s view of how the transaction altered the business and financial profile of the acquirer.
Acquirers involved in the highlighted acquisitions were rated by Fitch at the time of the transaction. The average Issuer Default Rating (IDR) of issuers increasing leverage by at least 50% was ‘BBB+’ prior to the transaction. The average IDR of acquirers increasing leverage by 10% to 49%, was ‘BBB-‘. An approximate 30% increase in leverage seemed to be the threshold for downgrades in this sample.
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More than 80% of the acquirers increasing leverage by 50% or more were downgraded by at least one notch. Within the cohort of issuers increasing leverage by 10% to 49%, 25% incurred single-notch downgrades, while the IDRs of the others were affirmed or upgraded.
None of the issuers highlighted became fallen angels at the time of the acquisitions but a few were subsequently downgraded to speculative-grade due to either longer-term operating or coronavirus-related pressures.
Fitch established post-merger deleveraging expectations and downgrade triggers during each respective rating review. Time frames for achieving leverage metrics within the negative sensitivities ranged from 18 months to 42 months.
Longer timeframes were allowed for the acquiring issuers with stronger credit profiles, due to cash flow visibility along with the ability and willingness to repay debt.
