Companies are borrowing the most in the loan market since 2008to finance acquisitions worldwide, betting that they can quicklyreplace the debt with permanent financing as yields on corporatebonds fall to records.

Anheuser-Busch InBev NV, the world's biggest brewer, obtained$14 billion in credit to buy Mexico's Grupo Modelo SAB, and NestleSA raised $8.5 billion for Pfizer Inc.'s baby-food unit, pushingloans for mergers to $221 billion this year, up 34 percent from thesame period of 2011 and the most since $276 billion four years ago,data compiled by Bloomberg show. Anheuser-Busch sold $7.5 billionin bonds last month that will partly repay the loans, while Nestleplans to do the same within 12 months.

While loan costs are rising, yields on bonds are falling,declining below 3 percent this week for the first time. Interest onshort-term credit average 1.29 percentage points more thanbenchmark lending rates, up from 1.19 percentage point a year ago,Bloomberg data show.

“The formula of banks providing a short-term loan bridge tobonds for corporate acquisitions has worked exceptionally well thisyear,” said Graham Lofts, the London-based head of internationalloan origination at Commerzbank AG. “Funding and regulatorypressures are making bank debt more expensive, but this newparadigm is not going to stop corporates from making importantstrategic moves.”

More stringent capital requirements introduced by regulators toprevent lending practices that exacerbated the financial crisishave made it more expensive for banks to extend loans, and promptedlenders in Europe to pledge more than $1 trillion of balance-sheetcuts.

Yields on company bonds globally fell to an unprecedented 2.998percent as of July 31, from 3.014 percent a day earlier, accordingto Bank of America Merrill Lynch Data. The gauge was at 3.98percent at year-end and 3.64 percent a year ago.

Elsewhere in credit markets, the cost of protecting corporatedebt from default in the U.S. rose, with the Markit CDX NorthAmerica Investment Grade Index, which investors use to hedgeagainst losses or to speculate on creditworthiness, adding 3.1basis points to a mid-price of 108.7 basis points as of 11:26 a.m.in New York, according to prices compiled by Bloomberg.

The measure typically rises as investor confidence deterioratesand falls as it improves. Credit-default swaps pay the buyer facevalue if a borrower fails to meet its obligations, less the valueof the defaulted debt. A basis point equals $1,000 annually on acontract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of bondmarket stress, increased 0.3 basis point to 21.05 basis points asof 11:26 a.m. in New York. The gauge widens when investors seek theperceived safety of government securities and narrows when theyfavor assets such as corporate bonds.

Bonds of Goldman Sachs Group Inc. are the most actively tradeddollar-denominated corporate securities by dealers today, with 85trades of $1 million or more as of 11:27 a.m. in New York,according to Trace, the bond-price reporting system of theFinancial Industry Regulatory Authority.

Companies worldwide raised $2.27 trillion from bonds this year,up 2 percent from the same period of 2011, according to Bloombergdata. In Europe, bond sales overtook new loans this year for thefirst time, according to a Fitch Ratings report from July 3. Notedeals made up 52 percent of the 467 billion euros ($571 billion) ofnew corporate funding in the first half of this year, compared with29 percent for all of 2011.

Within two weeks after announcing on June 29 its plan to obtain$14 billion loans for the purchase of a 50 percent stake in GrupoModelo, Leuven, Belgium-based InBev sold $7.5 billion of notes tofund the deal with coupons at the lowest on record for bonds ofsimilar maturities issued by the company.

The maker of Budweiser and Stella Artois agreed to pay interestat a margin ranging from 110 basis points to 240 basis points if ituses a three-year $8 billion loan. The $1.5 billion in 0.8 percent,three-year bonds it sold last month were priced to yield 33 basispoints more than the London interbank offered rate if swapped intofloating-rate debt.

Nestle's Financing

Nestle, the world's biggest food maker, obtained an $8.5 billion364-day loan in July as a backup facility for its $11.9 billiontakeover of Pfizer's baby-food unit.

The Vevey, Switzerland-based company will pay interest at 20basis points more than benchmark lending rates to use the funds,which is double the margin it agreed to pay for a 4.5 billion-eurocredit line last year, according to Bloomberg data.

Lenders led by Citigroup said Nestle plans to cancel the loanwithin 12 months with bond sales.

“These companies are taking advantage of attractive valuationsand very low bond funding costs to expand,” said Suki Mann, creditstrategist at Societe Generale SA in London. “Any new supply comingfrom these well-known blue chips will provide existing bondholdersa chance to top up their exposure or for new investors to getin.”

InBev's move to sell bonds to lock in half of the funding forthe Modelo acquisition more than five months before the deal closesmay be a signal of management's concern that debt might not be ascheap again when it actually needs it, research firm CreditSightsInc. said in a July 11 note.

“The market is not concerned that the recent increase of M&Adeals may be an ominous sign that we are heading back towards adebt fueled acquisition path,” said Societe Generale's Mann. “Whatwe are seeing is a few opportunistic deals.”

Companies sold $78.8 billion of bonds for acquisitions andbridge-loan repayments this year, compared with $76.4 billion ayear earlier, Bloomberg data show.

While borrowing for mergers is on the rise, the volume of dealsis down. Companies worldwide announced $978.6 billion ofacquisitions this year, including $556 billion in the secondquarter, compared with $1.2 trillion in the same period of 2011,data compiled by Bloomberg show.

About 40 percent of the global loan volume for acquisitionscomes from deals in the U.S., and about 33 percent from Europe, theMiddle East and Africa, Bloomberg data show.

China, Japan

China surged more than six times to $5 billion and Japan rose atleast 35 percent to $10 billion after Tokyo-based Dentsu Inc. got395.8 billion yen ($5 billion) of loans to finance its purchase ofBritain's Aegis Group Plc., Bloomberg data show.

“Cash-rich Japanese corporates including large trading houseshave more than doubled overseas acquisitions this year,” saidMichael Potter, assistant general manager at Sumitomo MitsuiBanking Corp. in London. “This is a trend that is set to continue.Europe has long been the favorite destination for Japaneseacquirers on the lookout for assets. The relatively strong yen hasspurred Japanese companies into M&As.”

The yen has advanced 14.7 percent against the euro and 3.2percent against the pound the past 12 months. China's yuan rose5.96 percent against the pound and 17.7 percent versus theeuro.

Cnooc Ltd., China's biggest offshore oil and gas explorer, isseeking about $5 billion of short-term loans to fund its $15.1billion offer to buy Canada's Nexen Inc. in the largest overseasbid from a Chinese company, according to two people familiar withthe matter.

“China's vast foreign currency reserves need to be put to workand an increasingly stronger yuan is making European and U.S.assets cheap,” Potter said. “The European market has the attractionof being more diversified than the U.S. and with the Eurozone introuble, there are chances to pick up cheap assets.”

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