M&A Renaissance. Exploring Fixed Income Opportunities

M&A activity, which is growing among IG and HY issuers, is driven by expectations of lower funding costs and a weak macroeconomic environment. This trend, which is set to strengthen, generates investment opportunities in new bond issues, often priced at a discount, to be evaluated with rigorous analysis to select the most promising opportunities.

• The chart shows the evolution of bond and loan issuance linked to M&A transactions by issuers with Investment grade (IG) and High Yield (HY) ratings from 2020 onwards and our preliminary estimate for the current year, which shows an acceleration in issuance after a 2024 that turned out to be a sharp increase compared to the more modest M&A-related issuance activity in 2022-2023.
• But what should drive more M&A deals and M&A issuance? Certainly, generalized expectations of a reduction in leveraged funding costs, which companies undertaking M&A transactions resort to, following the decisions of the main Central Banks (Fed, ECB, BoE) to lower the cost of capital during 2024. In addition, a still anemic macroeconomic framework is pushing companies’ management towards M&A and spin-off transactions in order to obtain better valuations. We believe that these reasons are also valid in 2025, and under the new US administration they will be able to find further impetus.
• The expected further growth in bond issuance, both by IG and HY issuers, will provide new investment opportunities. These issues are generally priced at a discount to the current bond prices of the same issuer but traded on the secondary market, as additional credit risks must be priced in. This is linked to the possible increase in leverage and the possibility of downgrading ratings for transactions with more aggressive structures, as well as to take into account the uncertainty related to the difficulty of achieving synergies and achieving the expected benefits from the transactions, especially if they are complex.
• Investment opportunities linked to M&A transactions can therefore prove to be a good investment if evaluated on credible prospects of improvement in the companies’ fundamentals. These opportunities will have to be carefully selected, case by case, making use of rigorous research and analysis, including credit, which allows a correct assessment of risks, to direct investments only on those transactions with the greatest probability of success and with a risk profile already adequately reflected in the levels of the spreads.
• The increased M&A activism has been noticed also in sectors which have been relatively quiet on the M&A front in recent years such as the Basic Materials sector, with for instance large mining group RIO Tinto issuing $9bn of bonds in March 2025 to fund its acquisition of Arcadium Lithium and another major mining company, BHP, issuing $3bn bonds last February to partly fund its acquisition of mining rights and copper deposits in Argentina alongside JV partner Lundin Mining. Even in the auto sector M&A deals are likely to play a bigger role, with the failed merger talks between Honda and Nissan to consolidate the Japanese car industry likely to resume later this year after Nissan CEO, who opposed the deal, has recently stepped down, making it easier to resume M&A talks in our opinion.