be applied just yet.
Standard & Poor's Ratings Services expects M&A activity to accelerate this year, given favorable economic and market conditions. At the same time, increasing volatility in the credit profiles of potential acquirers and target companies may present new uncertainties for investors.
Attractive growth opportunities in the region lured some of the excess global liquidity to Asia-Pacific in 2006. Private equity and buyout firms accounted for more than US$45 billion worth of deals, or 12% of overall activity, according to Dealogic. Standard & Poor's expects M&A to remain strong in 2007 amid:
+ A resurgence of Japanese corporate activity
+ Banks' and insurers' desire for growth
+ Newly formed infrastructure funds looking to invest
+ Chinese companies' continuing expansion
+ Rapidly growing Australian LBO activity and
+ Interest from funds and corporations outside the region
Asia-Pacific entities are increasingly casting their nets beyond the region to search for growth and development opportunities. Many Asian companies enjoy unfettered access to funding because of the region's strong growth, benign credit conditions, and liquid markets. They are keen to build on solid
earnings and leverage their strong balance sheets to fund expansion, furthering the development of the high-yield market.
"Increasing risk-tolerance and appetite for debt to finance M&A will be a key risk to credit quality in 2007," warns Standard & Poor's credit analyst Chew Ping. But investors are unlikely to curtail their very high tolerance for debt leverage, nor are companies likely to ready themselves for an inevitable turn of the cycle. "We expect that M&A activity will help to deepen the region's high-yield market, but at the cost of a number of fallen angels, as well as a likely slight increase in the number corporate defaults, from what is
now a cyclically low number."
Utilities, banks are among hottest sectors
The region's key M&A attractions are consolidation, notably among utility sectors, and inter-regional activity, particularly in banking. Overall, the insurance sector continues to enjoy strong growth prospects, most prominently in the rapidly expanding and underinsured markets of China and India, with in-market consolidations and inter-regional plays accounting for the majority of transactions. In Australia, meanwhile, media plays are increasingly on the M&A radar.
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