Magazine article Business Credit

Watch Sectors for Debt-Fueled M&A Activity

Magazine article Business Credit

Watch Sectors for Debt-Fueled M&A Activity

Article excerpt

When an industry sector experiences a series of mergers and acquisitions propped up by high levels of debt, it can leave companies struggling to realize profits and eager to produce gains at greater credit risk.

Take the European chemicals sector, in which companies have been involved in a spate of recent, largely debt-funded mergers and acquisitions activity. This situation leaves them little flexibility to pursue new deals over the next year to year and a half without risking downgrades, according to Moody's Investors Service.

"Most European chemical companies now have limited headroom for further debt-funded M&A, but the pressure to continue acquisitions to boost future revenue and earnings growth is intense as firms struggle to grow organically post-2008," said Francois Lauras, a Moody's vice president and senior credit officer. "Low interest rates will continue to incentivize many buyers to fund transactions with debt, but this will inevitably put their current ratings at risk. …

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