London - Companies in Europe have amassed about $1 trillion (R10 trillion) through earnings, bond sales and by refinancing credit lines, foreshadowing a potential surge in acquisitions and investment.
Glencore Xstrata, Siemens and Daimler are among at least 50 companies that refinanced e143 billion (R1.9 trillion) of credit facilities this year paying an average interest margin of 0.59 percentage points, the lowest since 2007, data show. Lower debt costs have helped Stoxx Europe 600 index members to accumulate more than e600bn in cash, adding an extra e200bn since 2008, as companies hoarded profits and shied away from takeovers during the region’s longest recession.
Europe’s biggest firms now have ammunition for growth after almost five years of central bank stimulus measures and suppressed borrowing costs. Almost 70 percent of executives expect company mergers and acquisitions to increase in the next 12 months and more than half say growth is their primary focus, according to a survey of 1 600 decision makers conducted last month by accounting firm EY.
Sentiment toward European credit has improved with investors emboldened by signs of tentative economic growth and after European Central Bank (ECB) president Mario Draghi’s surprise decision to cut interest rates to a record low of 0.25 percent on November 7.
Gross domestic product in the euro zone rose for a second quarter, increasing 0.1 percent in the three months through September, following a 0.3 percent expansion in the previous three-month period. The inflation rate slowed to the lowest level in four years in October, prompting the ECB to cut its benchmark rate.
Profit at Stoxx 600 companies will climb to e21.83 a share this year on average, a 9 percent increase from last year and the most since reaching e29.32 in 2007, data show.
The average yield investors demand for junk-rated bonds fell below 5 percent for the first time last week, according to Bank of America Merrill Lynch index data. Yields on investment-grade notes are approaching a five-month low of 1.99 percent, the data show.
More than half of European investors in a Fitch Ratings survey expect mergers and acquisitions (M&As) to rise next year as the economy recovers and as companies become more willing to use cash reserves, the ratings agency said, citing a survey of fund managers with e7 trillion of fixed-income assets.
“The overall percentage of respondents expecting moderate or significant use of cash to fund M&A activity was at its highest level for more than two years,” Monica Insoll, the managing director for credit market research at Fitch, wrote in the report. “The rate of activity is likely to be accelerated by a closing window for companies to raise low-cost debt.”
Europe’s investment-grade borrowers are negotiating the lowest pricing on revolving credit lines and term loans since 2007. The average interest rate paid for corporate loans has fallen to 83 basis points above benchmark rates from 132 basis points last year, Bloomberg data show. Average margins on revolving loans have dropped to 59 basis points from 114 basis points last year.
Glencore Xstrata obtained $17.3bn of loans in June to replace existing facilities with better terms. Last year Glencore offered to pay 175 basis points above benchmark rates for a three-year revolving loan. This year it agreed to pay a 90 basis-point margin for such a facility.
Investec said the commodity supplier might use $6bn of surplus cash for acquisitions or to restart capital projects.
In September Daimler arranged a E9bn credit line with a 27.5 basis-point margin to replace a E7bn loan with a 60 basis-point margin.– Bloomberg