LONDON (Reuters) - Healthy investor appetite for corporate bonds should help Kraft Foods Inc and other companies fund mergers and acquisitions, given bank loans are still scarce after the credit crisis.
U.S. food group Kraft is seen as a likely candidate to take the "bridge loan to bond" route to provide money should its proposed takeover of British confectioner Cadbury go through.
"Banks will be very happy to offer bridge financing on a 12-month basis but, ultimately, for a deal of this size it would have to be brought into the public bond markets," said Patrick McCullagh, head of UK and European credit research at asset manager Schroders.
Bond markets were a viable alternative as they are flush with institutional and retail investor cash, he said. "Retail investors have been throwing money (into corporate bonds) since equity markets and money market funds started to offer sub-par returns."
Kraft is most likely to ask banks for a bridge loan to help finance its proposed bid, analysts and bankers said.
"A bridge loan means that they are coming to the bond market," said Paul Owens, head of fixed income research at British fund firm Liontrust.
Kraft may have to raise its bid to win Cadbury, but will not want to lose its investment grade credit rating in the process.
"An increased offer with a cash component of 450 pence would enable the combined group (Kraft/Cadbury) to maintain its investment grade rating," UK stockbroker North Square said.
Kraft, rated Baa2 by Moody's Investors Service, A- by Standard & Poor's and BBB by Fitch Ratings, is at the lower end of the investment grade spectrum but the solid character of the sector it is in should give extra support.
"Given the sector, consumer non-cyclicals, there is an awful lot of comfort you could gain even from a company that low in the investment grade spectrum," McCullagh said.
French entertainment and telecoms group Vivendi, rated BBB by Fitch and S&P and Baa2 by Moody's, could also go to the bond markets to help fund its proposed $2.9 billion bid for Brazilian telecom company GVT, he said.
The bond market will be likely to support borrowers whose managements are experienced in acquisitions and who explain strategies clearly, including how they plan to deliver over time, said John Stopford, Investec Asset Management fund manager and co-head of fixed income.
He cited Imperial Tobacco as a company that has done successful acquisitions and then brought gearing down again.
"It's the more compelling deals that are going to get done, and the deals where, potentially, the scope for bringing businesses together and then taking out costs is more significant and more obvious," he said.
Before the credit crisis, loans were cheaper than bonds, but this was reversed as banks' funding costs soared.
Roche, the pharmaceutical company, for example, early this year ditched a loan and went directly to the bond markets instead to raise about $30 billion for its $47 billion takeover of rival Genentech.
The volume of bank loans completed to back M&A activity so far this year has more than halved to $95 billion, from $219 billion in the 2008 period, according to data from ThomsonReuters LPC.
But there are signs the loan market is starting to thaw as banks have got more capital to lend and are keen to target high quality companies. The price of loans is coming down too.
German utility RWE illustrated this trend with a 2 billion euro refinancing priced at 60-70 basis points over Euribor, a new low for the year.
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