CVS Eyes Jumbo Hi-Grade Bond Offering to Back $48B Cash Portion of Aetna Buy

CVS Health (NYSE: CVS) has announced the structure for its jumbo benchmark offering of SEC-registered senior notes as an offering in as many as nine parts, as the company seeks debt financing for the roughly $47.9 billion cash portion of the purchase price for its mammoth acquisition of Aetna (NYSE: AET). Based on the remaining bridge financing, the deal is on track to become at least the third largest corporate placement on record, according to LCD.

Early whispers are out in the T+110 area for two-year notes due March 9, 2020 and in the T+120 area for three-year notes due March 9, 2021, and at the LIBOR equivalents for same-dated FRNs for both tenors. Whispers started in the T+140 area for five-year notes due March 9, 2023, the T+160 area for seven-year notes due March 25, 2025, the T+175 area for 10-year notes due March 25, 2028, the T+200 area for 20-year bonds due March 25, 2038, and the T+215 area for 30-year bonds due March 25, 2048.

For reference, the issuer’s 2.875% notes due 2026 traded this morning at T+128, or a G-Spread of 133 bps, and its 5.125% bonds due 2045 traded at T+178. Reflecting the expected new-issue concessions required to clear the blockbuster M&A financing, the outstanding notes are 30–40 bps wider since the end of January, after speculation mounted that CVS would tap the bond markets sooner than later. The issuer’s 3.5% notes due July 2022 traded this week at T+100 and its 4% notes due December 2023 at T+122, both roughly 25–30 bps wider since the end of January.

The company last week tapped active bookrunners Barclays, BAML, Goldman Sachs, and J.P. Morgan to arrange fixed-income calls on Friday, March 2, and Monday, March 5. Wells Fargo is passive bookrunner.

All but the 30-year tranche of today’s offering are subject to a special mandatory redemption, at 101, in the event the merger does not close by Sept. 3, 2019. The merger was slated to close in the second half of this year, pending regulatory approvals. The issues are all subject to make-whole call provisions, and the 2023–2048 issues carry standard tenor-specific par calls prior to maturity. All tranches are subject to change-of-control put provisions.

The $77 billion price tag for the Aetna play includes the assumption of roughly $9 billion of Aetna debt. The bond effort comes after CVS in December obtained a $5 billion unsecured A term loan from a group of 20 banks backing the M&A play. Barclays, Goldman Sachs, Bank of America Merrill Lynch, J.P. Morgan, and Wells Fargo acted as joint lead arrangers. Barclays is administrative agent. As a result of the term loan agreement, the size of the $49 billion M&A bridge facility was reduced by $5 billion.

In terms of the biggest corporate offerings on record, the top spots are held by Verizon, which placed $49 billion of notes in September 2013 to round out its ownership of Verizon Wireless, and Anheuser-Busch InBev, which printed a $46 billion trade in January 2016 for its SABMiller buy. AT&T last July placed the third-largest deal at present, with a $22.5 billion offering to support its bid for Time Warner. Actavis Funding inked $21 billion in March 2015 for its Allergan acquisition, and Dell/EMC placed $20 billion of notes in May 2016.

CVS’ own $15 billion offering in July 2015—to back its acquisitions of Omnicom and Target’s pharmacy business—is among the 20 largest corporate deals on record.

Five-year CDS referencing CVS debt was indicated at 68 bps this week, roughly in line with indications around the time of the CVS/Aetna M&A announcement in early December last year, and up from an interim low of 58 bps at the start of 2018, according to Markit.

The present BBB+/Baa1 ratings on CVS are under review for downgrade. Aetna’s A grade at S&P Global is under review for downgrade, while Moody’s on Dec. 4 affirmed its lower Baa2 rating and stable outlook on Aetna.

CVS last week disclosed a financial update related to the Aetna transaction, and noted glowing press characterizations of its performance this week before the House Subcommittee on Regulatory Reform, Commercial and Antitrust Law.

“We believe that this transaction, through better pharmacy care and coordination with primary care professionals, can make a significant dent in reducing health care costs,” CVS general counsel Thomas Moriarty told the committee. “Put simply, to make real progress on behalf of consumers, and the health care system, we have to break the current logjam.” — John Atkins

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