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Big Corporate War Chests to Drive Mergers: Strategist

While governments have largely failed to lower debt and the consumer in many parts of the world remains highly leveraged, companies have been leading the way in repairing their balance sheets.

HSBC believes that if net debt-to-equity levels for companies were to return to the 10-year average, firms would be able to raise $2.7 trillion, a war chest that would help the recent M&A boom continue.

“Balance sheets are as healthy as they have ever been, as highlighted by our net debt to equity analysis, which shows that leverage in World plc (non-financials) is at its lowest level for at least 20 years,” said Robert Parkes, an equity strategist at HSBC in London in a research note.

“To put this in perspective, if net debt to equity were to go back to its 10-year average, it would realize $2.7 trillion of additional funds for global companies.”

“The availability of finance—certainly in the case of the larger companies—is also improving. Credit yields for investment-grade-rated companies continue to trade at a lower level than when the credit bubble was in full swing,” said Parkes.

“Increased business confidence combined with very strong balance sheets in a more stable macro environment should prove to be a fertile breeding ground for further deal activity.”