By Nicholas Paisner and Neil Unmack
The credit markets are slowly getting back to full health. The latest sign of vigour is a flurry of acquisition financing in the mining sector. On Monday, a consortium of banks lent Vedanta Resources $6.5 billion to help fund its purchase of a majority stake in Cairn India. Two days later, six large banks put up $45 billion to finance BHP Billiton's hostile bid for Canada's Potash Corp, according to Reuters.
The recent deals follow a good summer for large companies in the bond market. Earlier in August, blue chips IBM and Johnson & Johnson sold bonds at record low yields. July was the busiest-ever month for debt issues by emerging market governments and companies.
This buoyancy has allowed companies to refinance bank borrowings in the capital markets, freeing up lenders' balance sheets. The result has been a sharp drop in the cost of corporate loans. The average spread over Libor for an "A" rated borrower has halved from 145 basis points in the second quarter of 2009 to around 70 basis points today, according to Thomson Reuters LPC.
For banks, deal-related financing is particularly attractive. Companies tend to rely on fewer lenders in order to preserve secrecy, which makes it harder to squeeze prices. Banks involved in the deal are also well-placed to pick up fees for advice and other financing services.
Banks' new-found appetite for deal financing has its limits. They tend to favour large, cash-generative companies. And they expect a large proportion of acquisition-related loans to be refinanced quickly.
