Investors Scramble To Get A Piece Of CVS’ Gargantuan Bond Deal As IG Yields Surge

Following a period of relative quiet in the high grade bond market, today a mini quake will hit when CVS Health is set to test the health and depth of the bond market with a super-jumbo sale of $44.8 billion in IG bonds to help pay for the company’s $69 billion acquisition of Aetna.

This would be largest corporate bond sale in more than two years and, and – at the rumored $44bn – will be the third largest bond deal behind Verizon’s $49 billion issuance in 2013 to fund its purchase of Vodafone’s stake in Verizon Wireless, and Anheuser-Busch’s 2016 $46 billion bond offering to pay for SABMiller.

“Everyone on the buy side is going to be looking at this deal,” Matt Salzillo, a portfolio manager for Ryan Labs Asset Management, told the WSJ: “We want to see how well the CVS deal is absorbed by the market.”

The bond deal will consist of 9 parts, and according to Bloomberg there is “strong investor appetite and a willingness to pay a liquidity premium to participate in the most visible trade so far this year.” It explains the recent weakness in the long-end of the curve where investors have been actively “rate-locking” ahead of today’s issuance, resulting in a sharp steepening on Friday when rate-locks sales were cited as the culprit. Today’s bull-flattening in the curve is also said to reflect speculation that the long-end tranche has been rate-locked and that there will be fixed-rate demand at pricing to unwind the hedge, per BBG.

Regulators aren’t expected to pass judgment on the Aetna purchase until late this year but CVS plans to raise its acquisition financing in a single day to avoid the risk that interest rates rise before then, the WSJ reported. The lower underwriting risk, CVS has hired five investment banks – Barclays, Goldman Sachs, Bank of America Merrill Lynch, JPMorgan and Wells Fargo – to arrange the sale, a larger group than normal.

CVS will sell bonds with repayment dates ranging from about two years to 30 years and the 30-year portion would remain outstanding even if regulators reject the deal, which would force CVS to buy back most of the debt, investors said.

On Tuesday, CVS marketed the 10-year portion with a yield 175 bps points above 10Y TSY, or roughly 4.65%.  The 30-year tranche may yield 215 bps above Treasuries, according to BBG.

As noted above, all of the tranches except the new 30Y will include a mandatory redemption clause that requires CVS to withdraw the debt at 101 cents on the dollar if it does not complete its takeover of Aetna by September 3, 2019.

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On Tuesday, S&P downgraded CVS to “BBB” from “BBB+,” outlook stable, and removed ratings from watch negative, citing the company’s expected risk profile following the issuance of senior unsecured notes to partly fund the purchase of health insurance provider Aetna Inc.

  • CVS’ financial risk profile will weaken considerably from the significant increase in debt S&P says, with pro-forma adjusted debt to EBITDA increasing to about 4.5x from 2.9x prior
  • Stable outlook reflects S&P’s expectation that CVS will pay down debt, resulting in leverage improving to the low-4x area within one year from closing

None of that matters to investors, however, who are certain to leave the offering significantly oversubscribed: street talk is that there is already some $100 billion in demand penciled in.

Regardless of what CVS does, keep an eye on overall yields which in recent weeks have been surging alongside overall rates, and as of today, the Bloomberg Barclays aggregate Yield to Worst was the highest since 2011


… which while also ignored by investors, will soon be felt by companies who are issuing hundreds of billions in bonds to fund buybacks; the problem is that the higher the yield goes, the less attractive it becomes to issue debt and buy your own stock.