Plenty of Cheap Debt to Go Around

BOND STRATEGIST: While LBOs appear poised to increase, we continue to think that strategic deals will outweigh financial transactions in 2013

Dave Sekera, CFA 29 January, 2013 | 10:00AM

Since the reports emerged that Dell (DELL) may be subject to a leveraged buyout, bond investors quickly dusted off their LBO handbooks and began to play some defence in their portfolios. 

Bonds of those issuers that historically have been identified as LBO candidates were soon offered out into the market, but activity in the secondary market became very sketchy. Trading in those names dried up, as sellers were unwilling to lower their offers enough from pre-Dell announcement levels to entice buyers. Neither sellers nor buyers had enough conviction to find a middle ground in which to cross bonds. In the merger and acquisition community, private equity sponsors are reportedly ramping up their due diligence teams as they scour for targets, and the leveraged finance teams at the large multinational banks are updating their pitch books.

Morningstar's equity and credit analysts have finished their semi-annual Merger & Acquisition Insight. In this report, we highlight firms that we think are takeover candidates as well as firms that are likely strategic buyers. Our credit analysts scoured the bond covenants of potential takeover targets and conducted an upside/downside analysis to highlight those bonds that are most at risk of suffering large losses in an LBO scenario, as well as identify those bonds that may improve from being acquired by a larger, investment-grade corporation.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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