OK, I Get it, this is Going to be a Mess: Standard & Poor’s Lowers Boom at Worst Possible Time

Worst drop in the “net outlook bias” since the Financial Crisis.

The world’s biggest beer conglomerate Anheuser-Busch InBev’s acquisition of the world’s second biggest beer conglomerate SABMiller, both of which are getting their clocks cleaned in the US by over 4,000 mostly upstart craft brewers, isn’t going to improve the flavor of their brewskis. But the $106-billion deal is going to flood the market with one of the largest bond offerings in history.

It’s the first big bond deal this year. To fund and complete last year’s M&A frenzy, many more bond deals are looming on the horizon, at the worst possible time since 2009, according to Standard & Poor’s.

AB InBev has now started marketing this bond monster. In October, it was rumored that it could eventually issue $55 billion of bonds, plus up to $15 billion of loans. The US portion of the deal now being marketed is likely to be about $25 billion, Bloomberg reported. That alone would make it the second largest offering to finance an acquisition, behind Verizon’s $49 billion offering to fund its Vodafone deal.

About $630 billion in mega acquisitions from the record M&A frenzy in 2015 are scheduled to close this year and are still waiting for funding, according to Bank of America strategists cited by Bloomberg. They include Dell, Anthem, and Newell Rubbermaid. On top of the acquisitions this year.

But the end of the credit cycle has set in. The ratings agency downgrade tango has started. Defaults are rising. Credit is tightening up. Investors are getting a little more skittish…. S&P Capital IQ Global Credit put it this way in its new report titled, “Global Corporate Rating Trends 2016: Largest Negative Swing Since 2009”:

Corporate issuer ratings globally are at their highest negative level since 2009.

Standard & Poor’s Ratings Services has the most number of ratings on negative outlooks relative to positive ones at Dec. 31, 2015, since June 2010.

The net outlook bias deteriorated to a negative 11% at Dec. 31, 2015, four percentage points down from six months previously. This constitutes the worst half-year change in the net outlook bias since the 2008-2009 global financial crisis.

OK, I get it, this is going to be a wild mess.

For the US market, Standard and Poor’s credit outlook is “cautious.” It is fretting about the “rising negative outlook bias” for 2016:

The commodity sectors and leveraged finance remain most vulnerable.

Investment-grade issuers face risks from M&A and the resulting pressures on credit metrics.

Investors’ cooling appetite for risky securities and rising interest rates could also spur tighter lending conditions.

We believe credit risks are rising as the corporate credit cycle worsens. Corporate issuers can achieve only so much margin improvement solely through cost-cutting, in our view, so they will need stronger revenue growth to survive this credit cycle.

Turns out, that hoped-for “stronger revenue growth” is exactly what has been lacking. According to FactSet data, 2015 is going to be the year when S&P 500 companies seamlessly chained together four quarters of revenue declines.

Since revenue growth is so elusive, companies have gone on an acquisition binge to show some kind of growth. Meanwhile, Standard & Poor’s expects the US corporate trailing-12-month speculative-grade default rate to jump to 3.3% by September 2016, from 2.5% in September 2015, and more than double the default rate in September 2014.

New debt to finance M&A activity is particularly on the hot seat, and borrowing costs could rise further across the sectors as investors sell existing holdings to load up on the new higher-yielding bonds. Just the announcement of a merger can widen bond spreads – the difference over Treasury yields – as investors are getting nervous about the financing needed to fund the deal.

And ratings agencies have begun to downgrade many of the M&A queens, based on the massive new debt they’re taking on to complete the deal and the deterioration in credit metrics that the deal will engender.

Already, bond spreads – the difference over Treasury yields – are getting jumpy, particularly at the lower end of the spectrum. For investment-grade debt, spreads have widened to 1.8 percentage points, from about 1 percentage point in mid-2014, according to BAML’s US Corporate Master Option-Adjusted Spread index. Average high-yield spreads have widened from 3 percentage points to 5.7 percentage points over the same period. And at the bottom of the scale, spreads of CCC-or-lower-rated junk bonds have spiked from 6.4 percentage points to 17.2 percentage points, the highest since June 2009.

And the disaffection is spreading to tech deals. Bloomberg:

Bonds in the tech and oil and gas sectors, which account for the biggest chunk of acquisitions expected to close this year, could see the most widening, analysts and investors said. Wells Fargo is recommending that clients reduce their exposure to companies in sectors that are likely to see more acquisitions, such as technology, where companies have room to add debt and revenue growth is slowing.

So with immaculate timing, AB InBev’s bond offering and the flood of other issuance come at the end of the credit cycle, after the Fed has finally decided to stop flip-flopping and raise interest rates while credit quality is deteriorating and revenue growth has stalled or reversed as the global economy is slowing. Investors are opening their eyes for the first time in years to glance at some of the risks they were blind to before. And risk aversion is cropping up again as a factor in the math.

The record acquisition-financing hangover from last year is going to pressure bond markets further. Investors might be less open to willy-nilly absorb mega acquisition bond deals. This will make it more expensive to raise acquisition-related debt. Some of the deals will flop and fail to get funded – marking the end of the M&A frenzy. And since that frenzy drove part of the stock market run-up, it’s disappearance is going to be sorely missed.

Credit markets have already left their skid marks on the hedge fund industry, and now investors are reacting. This data “will be met with dismay by the hedge fund industry.” Read…  Hedge-Fund Dazzle Has Peaked, Record Closures Next

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  41 comments for “OK, I Get it, this is Going to be a Mess: Standard & Poor’s Lowers Boom at Worst Possible Time

  1. CrazyCooter says:

    Here in Alaska, pot was legalized a year or so ago. The state and cities are still fumbling in the dark about regs and what not, but entrepreneurs are supposed to be able to start the process to open up here in a few months if I understand correctly.

    I am not sure of the count of states which are legalizing pot (CO, AK, WA, and probably others) – and this CAN’T be good for the booze pushers. I think it might be interesting to see what happened to volumes at distributors in these states as legalization phased in.

    I have long been frustrated with the oligopolies that brewers and distributors set up to protect their profits and keep prices higher than they otherwise would be. It is so bad where I live I can’t even get stores to order a beer from Texas that I like to drink – they just don’t care! Our local brewery has now marked all their products up 20% to 30% as of maybe a year ago – so it matches all the similar IMPORTED products – there is no price discrepancy left.

    The various segments that drink do so for different reasons. I am certain there are those segments that want to “veg” in the evening (or similar) and this is going to hit the bottom line for booze companies in a very big way.

    To be clear, people are always going to want to drink, but many businesses that produce, distribute, and serve alcohol are riding high on oligopolic practices – and they are about to get some serious competition in certain segments. I don’t see how big booze is a growth industry – which is probably why it is being unloaded in this orgy of mergers and bonds.



    • nick kelly says:

      Hi Cooter- I think the booze and pot markets are quite distinct. I am a bit of a drinker who has the VERY occasional toke. I know at least ten heavy pot smokers who don’t drink at all. A few are former alcoholics.
      Of course serious party types do both
      In my opinion if you want a drink pot won’t do and vice versa,

      • CrazyCooter says:

        “A few are former alcoholics.”

        That is precisely my point. I didn’t mean to imply booze went away, just that with the choice, when previously it wasn’t legal, there is only one way for demand to flow … from booze to pot … anyone wanting to go the other way already did.

        There just isn’t upside for booze with regards to legalization … the question is how much downside.



      • d says:

        There is no such thing as

        ““A few are former alcoholics.””

        Further dry Alcoholics who “pot” are generally “polloyaddicts” who may also use harder drugs, they tend to rotate their poison of choice as their dependency becomes obvious. or hard to manage.

        Pot is allegedly not Physically addictive. I have however, seen many regular pot users, who simply cant function, in any civil, or meaningful way, with out it.

        Pot is however an addictive lifestyle/social, choice

        • Nick Kelly says:

          None of the pot smokers I hang with do other drugs- altho some did in the past. I know the two I visit most would ask me to leave if I suggested
          doing a line.
          Serious coke and meth etc. types have almost no interest in pot.
          You sound like you are very poorly informed on pot. Altho it is not of course the greatest thing no medical association in the US, Canada, the UK etc. ranks it anywhere near alcohol, let alone hard drugs.

        • d says:

          “Serious coke and meth etc. types have almost no interest in pot.
          You sound like you are very poorly informed on pot.”

          Pot like tobacco is a gate way. Both of those drugs are used by pollys, pollys go round in circles. Unless you have been connected to several programs and observed them, you wouldn’t even know as they are even more cunning, than serious hard drug addicts.

          Hard users are not that interested in pot, until they cant get hard drugs, inability to score hard gear in North America, has never really been an issue for most addicts. So in N/A, the Polly issue, flies a little lower.

          And you sound like your are very poorly informed, about addicts and their rehabilitation issues.

          The issue isn’t getting the addict off, its keeping them off, and stopping them, substituting, (Pot/Booze/Tobacco, being the commonest Trio,) graduating, or retrenching, to another addiction.

  2. VegasBob says:

    I’m a bond investor.

    To put it bluntly, I wouldn’t touch this AB InBev bond offering at any interest rate, even if it were rated AAA and carried bond insurance.

    This reminds me of the tail-end of the M&A boom at the beginning of 2008. I think it’s gonna get real ugly.

    • d'Cynic says:

      The “management” of InBev got the last market crash just right, and almost buried the company with debt. Did they get it right again? If it kicked the dust, countless jobs would be created as a result of de-M&A, not to mention removing a lot of HoPi beer from the market. There is always upside to a downside.

  3. Ptb says:

    My guilty pleasure: natural light at $14 for a 30 pack. Can it get any cheaper?!

  4. TheDona says:

    In the original talk of the merger they wanted the synergy to go after the emerging African market. Africa??? So is this money to be used to buy the existing African bottlers and distribution for that “emerging” market? Didn’t make sense to me as the wealthier countries populace are Muslim for the most part and don’t drink, and the other countries populace is so darn poor.
    In that case the beer better be really cheap…as in cheaper than water. Would have been a better strategy to duke it out competitively here in the states for who has the cheapest swill for the “gotta get a buzz” crowd.

    • TheDona says:

      Ptb…no offense on the swill remark. LOL You posted before I finished.

    • WorldBLee says:

      When you say “cheaper than water” it reminds me that in the ancient world, beer often WAS a substitute for water as it could be drunk safely. The Egyptians drank beer daily, although it wasn’t like our modern beer (being thicker, sweeter, and more nutritious).

    • CrazyCooter says:

      “Believe it or not, 40% of Guinness consumed worldwide is being drank in Africa and the country that overtook Ireland in terms of enjoying this alcoholic beverage is Nigeria.”


      I also read somewhere about per capita alcohol consumption and I want to say the #1 spot went to a country in Africa … but I wasn’t able to source easily and it is late.



      • Laughingsong says:

        That’s because during the tender ministrations of the Troika, any Irish person who could fled screaming over the horizon. I’m one; when I heard about austerity coming to town, Himself and I ran so fast we caught up with our own backs. Now we live in Oregon and Himself is happy as a clam to abandon Guinness for Ninkasi Tricerahops and Hop Valley Alpha Centauri.
        Would the last person leaving [Ireland] please turn out the lights?

  5. Al Tinfoil says:

    The booze brewers better hope that the new pot smokers include beer on the menu when they get the “munchies”.

  6. B Tilles says:

    I think of the rating agencies (having worked for one) as a lagging indicator. After the battle they will promptly appear and shoot the wounded. As a franchise they are profoundly in danger of “disruption.” And in danger of the variables they they are ideologically incapable of seeing, like climate change.

    • ucde says:

      Can you elaborate on what you mean that they are in danger of “disruption”?

      • Nick says:

        I think he means that they don’t effectively estimate slow, long-term risks in favour of short-term financial issues.

      • B Tilles says:

        Hi ucde,

        What I meant by “disruption” is actually several things. First, in the last financial crisis it was revealed that their ratings process for certain types of financial instruments was totally corrupt. They took lots of money and slapped a triple A rating on what were in reality junk bonds. Bloggers like Yves Smith at Naked Capitalism and others have been all over this.

        Second, the actual analytical work they perform isn’t all that complicated esp. compared to what they charge. A not terribly clever financial analyst with solid programming skills could replicate their results fairly easily. In addition, most of their analysis utilizes publicly available data (historical by and large) so it’s not like there is a lot of forecasting or other proprietary stuff going into ratings.

        Lastly, the big three, S$P, Moody’s and Fitch have a virtual lock on the bond rating market. Typically a bond issuer needs two ratings to sell an issue. This is a tight oligopoly waiting to be challenged.

  7. Chicken says:

    Who’s on the hook when this falls apart, banks?
    “Some of the deals will flop and fail to get funded – marking the end of the M&A frenzy. “

  8. Tuba says:

    Some food for thought:

    I work as a commercial refrigeration mechanic. Sometimes my trade takes me into some of the new grow houses for the Colorado marijuana industry.

    One day chatting with one of the owners of a larger dispensary he said:

    “We harvest 50 pounds a week, we sell it for 200 dollars an ounce, and our electric bill is $10,000 a month.”

    Not a bad business to be in – except for the banking part…

    • Wolf Richter says:

      I’m waiting for some farmer in the Plains to figure out how to plant marijuana on his 100,000 acres, and have folks with a special combine come in and harvest and process it, and pack it into retail-size bags that a truck takes directly to the nearest warehouse. Meanwhile, it’s quoted and sold in electronic trading, and the farmer can hedge his future production. The commoditization of pot.

      • Jason says:

        The problem with high quality marijuana is that it doesn’t like being handled. If you used mechanical devices to harvest, brick, pack, and ship it, it would greatly decrease the quality. The BEST quality marijuana is homegrown where you carefully go through each process yourself and make sure the planet is full of trichromes. It’s the same way with tomatoes. Store tomatoes taste like watered down crap. Try growing some heirlooms yourself though and it’s like god personally came down and used magic to make them.

        • Wolf Richter says:

          True. We love heirloom tomatoes. But they’re seasonal. And they cost more. The good ones come from nearby because they’re fragile and don’t survive transportation well. And for the flavor to be fully developed, they should be harvested in a fairly ripe stage. So much of the year, there are no heirloom tomatoes from nearby (though they’re Mexican heirloom tomatoes, but in terms of taste, forget them).

          I would say only about 0.00001% or so (add or subtract some decimals) of all tomatoes sold in the US are heirloom. The rest are commodity tomatoes. And the same is going to apply to pot. There will be the special stuff from known growers nearby, and you pay extra, and there will be the commoditized pot for those who don’t want to pay extra, and farmers are going to figure this out once the industry is totally legal.

        • Jason says:

          Wolf it won’t let me respond to your 2nd comment but thanks for the reply. I just wanted to say that there will always be people who are willing to pay the extra for the high quality stuff. There is no comparison between store bought, watered down tomatoes and the black from tula heirlooms I can grow. Ditto for marijuana. The brick stuff is nasty dirt and the high quality crystal covered stuff will have you seeing unicorns. The finer things in life are worth the extra cost or time, at least as far as tomatoes and marijuana are concerned.

        • Wolf Richter says:

          Totally agree, Jason: “The finer things in life are worth the extra cost or time.”

          Except I have no opinion on marijuana because I don’t ever smoke anything. I get my high by swimming in the cold Bay without a wet suit. That high lasts for hours and is free! And it’s totally awesome.

        • Jason says:

          I mostly use marijuana now for migraines and insomnia. It’s like a miracle drug compared to the side effects from prescription medication. I too get a high from working out but I prefer weight lifting; it also aids me in other activities like wood cutting. Heirloom tomatoes can be had year round if you can them although they’re only slightly better than canned tomatoes you buy in the store. If you grow them you can eat them fresh for upwards of 5 months of the year. I’m doing 12 varieties this year.

        • nick kelly says:

          BC’s Okanagan region grows field tomatoes that are great. I make sandwiches out of just tomato, or eat them straight. like an apple. They are huge, streaked with orange colors and acidic.
          But the super markets in BC don’t handle them!
          You have to go there or hit farmers markets. This summer I bought 20 lb for 69 a lb
          I wont touch hot house crap.
          BTW: I am in Montevideo Uruguay right now and am gorging on their field toms.
          Good- but not quite as good as prime Okanagan- not acidic.
          BTW: there was a Canada- US tomato spat a while ago. The US said BC hot house were being dumped and got a duty.
          Canada said OK we’ll duty yours, and did.
          Then US figured out they sell more toms to Can than vice versa.
          So both were lifted.

      • nick kelly says:

        True_ I have some knowledge of the BC pot market and BC made Billions selling to US- over now and may be going into reverse,

        My point: if pot was legal good quality stuff would be at the MOST 20 an ounce,
        People are so used to the black market price they don’t realize how cheap it is to grow,
        BTW: tobacco is a pain in the ass by comparison: curing etc.
        Pot you just dry, and if its potent flavor is not a huge deal.
        Growers who support legal growing are in for a jolt if Dutch green house money/tech comes in.

    • CrazyCooter says:

      Margins at the onset are either very high or very low, and may move rapidly from one extreme to the other until things settle down. Don’t dismiss a deep-pockets-Rockefeller showing up to run competition in the ground to establish an oligopoly is established. Absent that, margins move to a sufficient level of return to attract efficiently used capital, but won’t stay “fat”.

      They may very well make good money, but if it is good enough, new folks enter the market and prices come down. And the black market hasn’t gone anywhere, so that puts a floor under prices, which may be a factor if taxes and other regulation muck things up and make legal pot too expensive.

      Personally, these guys are taking serious risks, but the savvy ones might make out alright in an otherwise crappy economy. No envy here.



  9. TArthur says:


    George Carlin was right. When asked what he would do about the “drug problem” he said “bring the price down”.

  10. MC says:

    We are stepping really into uncharted waters here.
    So far the largest bond issue has been the 2013 Verizon one at $49 billion. Even in those wildly optimistic times it looked like a freak one time event. After all the largest corporate bond issue to date had been Apple’s earlier in the same year which stopped at $17 billion, a measly half billion over the largest issue ever before that fateful year (Roche in 2009).

    But while these megaissues remain few and far between, the average investment grade issue has been creeping up steadily. In 2015 alone we had seven issues over $15 billion, an all time record. Apart from one, they all involved US-based companies. Their rationale was not bad: raise capital before interest rates increased and take advantage of investment grade rating to attract investors growing wary of an increasingly shakier junk bond market.
    What these funds were going into, however, was seriously worrying. As Mr Richter pointed out, these groups are effectively buying growth through M&A deals. Being profitable these days is not enough: what investors and board members expect is nothing short of neverending growth, if possible in double digit territory. As a friend of mine who works in corporate told me: “They expect every year to be 2007 and won’t hear reason”.
    Problem is we reached peak growth a while back, when monetary stimulus ran its course. The corporate world is unprepared to a long time of stagnating or even contracting growth.

    To get back to this megaissue, I’ve read projections 10-year bonds will be around 3.6% and 30-year around 4.6%. We are not very far removed from far more liquid US Treasuries, and a sign investors are both desperate for any scrap of discernible yield and growing wary of junk bonds.
    To be completely honest, investment grade rating or not, I wouldn’t touch these bonds at the present (rumored) rating. Plainly put if the bottom won’t fall off the whole bond market in 2016, it will well before these things come to maturity.
    And this is if everything goes according to plan, meaning InBev announces the usual post M&A massive round of layoffs, fast-talks according to protocol and, much more critical, it manages to stop sliding sales in the all-important European market.
    There’s no beating around the bush: InBev has gutted the goose to steal the golden eggs. Their prices are simply outrageous, something that one can only afford in a monopoly, which InBev hasn’t.
    German brewing companies either private (such as Paulaner) or State-owned (such as Weienstephaner) have rushed in to fill the gap with cheaper products.
    I am not a beer expert by any stretch of imagination, but the difference in quality between InBev and German products is simply staggering. Consumers and retailers are taking notice; lower price and higher quality are literally clubbering InBev sales, so much even supermarkets have started carrying these German beers.

    • Chicken says:

      Corn as an ingredient, isn’t found in great beer.

    • West says:

      It’s interesting to see if the “local” movement will move further to alcohol based products. As we saw in the last recession, locally owned and sourced restaurants survived while chains were put on the brink. There is a total boom (and coming bust) in micro-breweries, but it’s a trend that is here to stay once the expected and needed rationalization takes place. Craft distilleries for liquor are springing up everywhere, and as is the case with automobile dealers, the biggest impediments to competition are the large breweries who have the distribution networks locked up.

      If the local breweries around here could get their product in the bars and supermarkets, there wouldn’t be any “national” brands around.

      • TheDona says:

        Local Brews and spirits (Tito’s Vodka is a good example) are getting into bars, liquor stores , restaurants, supermarkets. They just don’t have the bucks to buy the name of a Stadium, do a Super Bowl add or lock up what can be sold within these venues. So people drink the overpriced AB InBev at sports, music events because that is all that is offered and then go home and drink craft.

        Speaking of locking up the distribution chain…The local HS can only sell Dasani water because they have a sponsorship (some small stipend) with Coca Cola. And they mandated you could not bring in any outside water to the HS sports events! Seriously HS sent note saying I could not pack water in my daughter’s sports bag. They would offer free Dasani to the athletes but spectators would have to purchase.

      • Saylor says:

        The ‘micro’ breweries are actually not new. Until after WWII it was typical for micro or small regional brewing. Interesting that in reading the “Fourth Turning” the authors mentioned that after the ‘crisis’ stage was the stage when people conformed to the big name products. “I only use (insert name) in my household. And pretty much everybody did. So will micro breweries fail next time around? Maybe. But we also have some changing demographics not faced since WWII.

  11. Vespa P200E says:

    Great timing Bud!

    Talk about the mother of all soon to be JUNK bond offer at the cusp of debt fueled melt down…

    But the lemmings will line up for higher yield with full trust in good ol Bud – never mind many will lose their principal…

    • West says:

      Per usual, this offering will wind up in mom-n-pops investments and they’ll be left wondering what happened.

      “We sell garbage to garbage men”

  12. TheDona says:

    Best (and scariest) article on the pre and post merger market share:


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