Monday, 17 December 2018

Investors cheer "win" on CVS M&A bond terms

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Drugstore chain CVS is offering investors a discount on some of the tranches of its US$40bn M&A bond to help finance its acquisition of Aetna, a move investors hailed as a breakthrough for the buyside.

According to several investor sources speaking to IFR, and The Credit Roundtable - a group that represents the buyside - CVS is breaking with tradition of pricing M&A bonds closer to par.

It is expected to price the five-year tranche at a price of 99, the seven-year tranche at 98.875, the 10-year at 98.5 and the 20-year at 98, according to deal documents seen by IFR.

Each of those tranches includes a special mandatory redemption (SMR) clause, which requires CVS to buy back the bonds at a cash price of 101 if the Aetna deal fails to close by September 3 next year.

“This is one in the win column for investors,” Matt Brill, senior portfolio manager at Invesco, told IFR.

“We expect this to be the mold for companies going forward.”

Investors have been pushing back on traditional SMR bond language to help protect their returns from rising interest rates. But they are also worried about an uncertain regulatory backdrop, and the risk that M&A deals fall apart.

The discount being offered to investors on the new bond gives them greater compensation in the event the M&A deal does not go through, the investors told IFR.

CVS said last month it expects the Aetna acquisition to close in the second half this year.

Both companies have been asked to submit additional information to the US Department of Justice. A shareholder meeting is scheduled for March 20 to vote on the transaction. nL2N1PY0WM



Aetna is well aware of the costs associated with failed mergers.

Last year, it had to redeem US$10.2bn of bonds that were issued to finance a US$34bn merger with Humana. The company had to terminate the merger agreement when a US federal court ruled against the deal. nL8N1FZ5W4

SMR language contained in M&A bonds has become a hot topic of late after the DoJ filed suit to block AT&T’s mega-merger with Time Warner.

Some US$22.5bn of US dollar bonds were priced in July to finance the deal, but the bonds will be redeemed at 101 on April 22 if the deal is not consummated by then.

The DoJ’s hearings on the matter do not begin until March 19, however, and the merger agreement has since been extended to June 21.

AT&T also helped finance the Time Warner deal with euro and sterling denominated bonds which included SMR clauses.

In an effort to avoid triggering those clauses, it recently launched a cash and exchange offer on over €6bn-equivalent of that debt. nBw1C6gGMa



In a note to its members on Tuesday about the CVS bond offering, The Credit Roundtable said it was “encouraged to see some progress on improving the market standard language”.

“As opposed to conventional market methods of pricing the bond at approximately Par, they are proposing they will price at steeper discounts to Par the longer the tenor; from 5 years out to 20 years,” the note said.

“The higher fixed discount (between Par and the discount reoffer price) essentially shields bond holders for a portion of the downside risk of the bonds being redeemed in a lower yield environment.”

The changes, however, fall short of proposals The Credit Roundtable put forward in a White Paper earlier this year when it suggested the redemption price - should the deal not take place - be calculated using a spread-based methodology.

CVS’s discount falls short of that, but proposes a “novel way” of calculating the SMR, The Credit Roundtable said.

CVS has launched the US$40bn deal, and is expected to price it later on Tuesday. nL2N1QO0J6


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