The precarious credit situation is having implications beyond financial circles, threatening even resilient sectors like mining as borne out by yesterday's announcement by Anglo-Swiss mining giant Xstrata scrapping a potential $10 billion (£5 billion) offer for platinum producer Lonmin, saying current credit conditions would have made financing a deal impossible.
In August, Xstrata proposed acquiring Lonmin, the world's third-largest platinum producer, for £33 a share, saying it could do a better job running Lonmin's operations that have had difficulties meeting production forecasts. Lonmin rejected the bid, saying that the price was "inadequate" and that it has sophisticated technology and a new management team in place. Now, even Xstrata's interest seems to have waned (See: South Africa's Lonmin rejects Xstrata's $10 billion hostile bid)
Tough loan markets also make it harder to finance the few lucrative mergers and acquisitions deals that bankers are still working on, including BHP Billiton's hostile bid of more than $114 billion for Rio Tinto. BHP's loan is on hold until at least January although the deal will need to be re-priced in light of further market deterioration. (See: BHP's $114 billion bid for Rio gets Australia regulatory nod)
BHP Billiton said it was not concerned about the financing. Other deals, though, have suddenly been scrapped. Montagu Private Equity this week dropped plans to sell BSN Medical, a maker of bandages, and a private equity consortium walked away from a bid of £1.9 billion, or $3.4 billion, for the British media company Informa. (See: Montagu planning to sell BSN Medical)
The credit squeeze induced by the banking turmoil has also cast doubts on Roche's $43.7 billion bid for the rest of the American biotechnology company Genentech that it does not already own, with shares of Genentech now trading at below Roche's offer price. (See: Roche makes a $43.7-billion bid for Genentech)
Genentech has traded at a big premium to the $89-a-share offer from Roche since it announced an unsolicited bid in July. But recent fears over financing have stoked uncertainty and raised doubts about the scope for a higher offer.
The syndicated loan market, which is the primary source of funds for mergers and acquisitions, has all but dried up because it is becoming more difficult for banks to sell loans as a result of rising financing costs while the number of lenders shrinks.
The withdrawal, which comes a day before Xstrata had been ordered to "put up or shut up" by London regulators, saw Lonmin shares slide 630p - or 28pc - £16.38 in early trading. Xstrata shares rose 177p - or 10pc - to £18.95.
Xstrata, which had secured $15 billion of loan financing to buy Lonmin, said it had decided to cancel the deal because of worries about refinancing the package in the next 12 months. Major M&A loans typically have a large short-term component that needs to be refinanced in the bond market.
A hoard of large M&A loans mature in the next 12 months, and this deadline will push companies into the bond markets just as spreads on debt have exploded and fears of default grow.
Although the current credit squeeze has been mentioned as the cause behind Xstrata's disinterest, several analysts have called it merely an excuse for Xstrata to get out of an unfavourable situation. For one, Lonmin's shares are presently trading at a substantial discount to Xstrata's offer price.
Secondly, the current state of the platinum market also doesn't give Xstrata cause for confidence. Prices have skidded 40 per cent over the last two months, in part over concerns over demand from the automotive industry.
Under Takeover Panel rules, Xstrata is now barred for six months from making an offer for Lonmin unless another bidder steps in or unless the Lonmin board recommends an offer. However, Xstrata went into the market Wednesday and purchased another 22 million Lonmin shares at £19.79 each, bringing its total stake to 24.9 per cent and heightening expectations of a new bid down the line.