CVS borrows $40 billion for Aetna in 3rd-largest bond sale

Bloomberg

CVS Health Corp. completed the third-largest corporate bond sale on record to fund its acquisition of Aetna Inc., testing the appetite of a market that’s off to its worst annual start in decades.
The pharmacy giant issued $40 billion of investment-grade debt in a nine-part offering, people with knowledge of the matter said.
That’s surpassed only by Verizon Communication Inc.’s $49 billion offering in 2013 and Anheuser-Busch InBev SA’s $46 billion sale two years ago.
The blockbuster sale was a big test for whether the corporate-bond market can maintain the insatiable demand seen in recent years as yield seekers found few options elsewhere. With the Federal Reserve hiking interest rates and withdrawing its unprecedented stimulus measures—albeit at a slow pace—yields on investment-grade debt have climbed to the highest levels in six years.
Such a massive offering at juicier yields attracted interest from investors who had previously been staying on the sidelines. CVS said in a recent presentation it was targeting as much as $44.8 billion of new debt, but ended up offering $40 billion—even as bankers received orders for three times that amount. It was important to sell the deal at attractive prices to entice investors in a market that’s been on shaky footing this year, according to Matt Brill, a senior portfolio manager at Invesco Ltd.
“We’ve been saving all of our chips for this,” said Brill, who helped oversee around $226 billion of fixed-income assets as of the end of 2017.
“This deal awoke the sleeping giant. It needs to go well to get the ball rolling again and get people more interested in corporate credit again.”
CVS sold fixed and floating-rate senior unsecured bonds in nine parts. The longest portion of the offering, a 30-year security, yields 1.95 percentage points above Treasuries, after initial talk of around 2.15 percentage points, the people said, asking not to be identified as the details are private. CVS gathered $49 billion in bridge loans from 20 lenders in December as temporary financing for the acquisition, which it is looking to refinance with Tuesday’s transaction.
The company offered discounts to investors in all but the 30-year portion of the offering through what’s known as a special mandatory redemption, or SMR, clause, the people said. That reflects a push back by investors, Brill said, as such terms have become more important to bondholders since the Department of Justice filed suit to block AT&T Inc.’s merger with Time Warner Inc. It could also be a reflection of the recent rates and equity volatility, he said.
“This looks like a reasonably attractive entry point for investors,” said Travis King, head of investment-grade credit at Voya Investment Management in Atlanta.