Fixed Income  

Jackson targeting downgraded debt from M&A activity

Jackson targeting downgraded debt from M&A activity

Bond manager Matt Jackson is monitoring merger and acquisition (M&A) activity among healthcare and pharmaceuticals companies in the hope of picking up downgraded debt.

Mr Jackson, who works on the £19m Legg Mason IF Western Asset Retirement Income Bond fund, is focusing on “buying after the bad deed from good companies” amid an increase in share buybacks and sector M&As.

As companies come to debt markets to fund M&A activity, the manager wades in. This has seen him watching merger discussions between businesses such as German chemical and pharmaceutical firm Bayer and US agriculture company Monsanto.

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A corporate tussle between the two has been a focus of investor attention in recent weeks, with Monsanto continuing to resist acquisition attempts and recently rejecting Bayer’s offer to buy it for around $62bn (£43.7bn).

“One thing that has been notable is the huge amount of supply we have been having from companies to finance M&As or for share buybacks,” Mr Jackson said.

“We have had this theme of buying after the bad deed from good companies. They make large acquisitions and they come to the markets to finance them,” he said.

The manager said the debt was then downgraded because of the increase in obligations but companies often generated cash and deleverage later.

But such buying is unlikely to be indiscriminate, with the manager wary of certain industries. “There is much necessary M&A, but bondholder-unfriendly activity is happening in the technology sector,” he explained.

“There is Apple, which has cash piles. It seems to be coming to the bond markets frequently to finance share buybacks. That’s not a great story from a bondholder perspective.

“We are mindful because the technology trends can change. The iPhone’s great, but 15 years ago everyone had a Nokia. The technology sector’s one where we think there are a lot of potential landmines out there.”

The manager described Microsoft’s planned $26bn acquisition of LinkedIn as one such “landmine”.

While he conceded that the deal would not “kill” Microsoft, which has a significant cash balance, Mr Jackson noted such a deal would need financing through debt.

“They will come to the bond market to finance the deal, which has caused spreads in the name to widen in anticipation and Moody’s to place the AAA rating on watch for downgrade,” he said.

Elsewhere, the manager thought the portfolio had benefited from its diversified approach to the fixed income markets.

The fund, which saw its name, objective and investment policy change in November 2015, aims to provide a regular income stream, in excess of the prevailing interest rate in the UK, with a focus on capital preservation.

As such, 20 per cent of the fund is allocated to UK government bonds, with 50 per cent in global investment-grade corporate bonds and 30 per cent in global high-yield corporate products.

More than half of the high-yield allocation is taken up by a holding in Western Asset’s US High Yield fund.