3-6-18 8:14 AM EST | Email Article
By Matt Wirz 

Pharmacy chain CVS Health Corp. plans to sell about $44 billion of bonds as soon as Tuesday to help pay for its $69 billion acquisition of health insurer Aetna Inc. -- the largest corporate bond sale in more than two years and a bellwether for the health of the corporate bond market.

Yields of corporate bonds jumped in tandem with U.S. interest rates this year triggering a fall in bond prices and a decline in overall debt sales. Issuance of investment-grade corporate bonds amounted to $217 billion in January and February compared with $256 billion in the same period last year, according to data from S&P Global.

"Everyone on the buy side is going to be looking at this deal," says Matt Salzillo, a portfolio manager for Ryan Labs Asset Management, an asset management firm with about $7 billion of bond investments. "We want to see how well the CVS deal is absorbed by the market."

The decline of interest rates around the world in recent years pushed yield-starved investors to increase purchases of global corporate investment-grade bonds, fueling a record $3.32 trillion of issuance in 2017 as companies rushed to take advantage of low rates, according to data from Dealogic. Foreign purchases of the corporate bonds slowed this year as U.S. interest rates rose by half a percentage point and a Bloomberg Barclays index of the debt has declined 2.81% since January 1.

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, investors said. The company has hired five investment banks to jointly 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.

Fund managers eyeing the deal hope its size and market conditions will force CVS to pay a higher yield on the new debt than on its current bonds. CVS bonds due in 2026 yielded 4.19% Monday, according to data from MarketAxess, and the new debt could yield 0.15 percentage point to 0.25 percentage point more, fund managers said.

"I think the underwriters would be smart to bring this deal with a generous concession to the market," said Brian Kennedy, a portfolio manager at Loomis Sayles & Co., which manages $76 billion of investment-grade corporate bond investments. "Volatility is back and this one could give the market indigestion."

The bonds and loans CVS is borrowing for the acquisition would increase its debt load to around 4.5 times earnings before interest, taxes, depreciation and amortization, or Ebitda, from 3.2 times in June, according to S&P. The company said in marketing presentations for the bond deal that it intends to reduce that ratio to around 3.25 within two years by growing earnings and using excess cash to repay debt, investors said.

Write to Matt Wirz at matthieu.wirz@wsj.com


(END) Dow Jones Newswires

March 06, 2018 08:14 ET (13:14 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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