US Investment-Grade Bond: Actavis' US$21bn 10-tranche bond
Medicine goes down
In a year when M&A drove US corporate bond supply to another record, the US$21bn mega-deal backing pharmaceutical giant Actavis’ US$66bn purchase of botox maker Allergan stood out as one of the best on offer for yield-thirsty investors.
The 10-tranche issue was the second-largest on record, behind only Verizon’s US$49bn record-setter in 2013, and the biggest ever for a company teetering on the edge of junk – and one that had proven to be very acquisitive just months before.
Swooping in to save Allergan from a hostile bid from rival Valeant, the deal followed two other major acquisitions – of Forest Laboratories and Warner Chilcott.
Yet investors poured more than US$90bn of orders into the trade – including for the longest dated 20 and 30-year bonds that bore more duration risk – doing so without the protection of step-up coupon provisions in the event of a downgrade.
Bankers at the time said the deal hit the sweet spot for what investors were clamouring to buy.
“If you want to get some yield, you either go down in credit quality or out in maturities,” said one.
“If you like Actavis as a credit, this is your opportunity to buy into what will be one of the most liquid issues available. And you might as well go long to obtain yield.”
The bond, which was priced in the first week of March, followed an US$8.4bn equity raise just days before that came at very attractive terms for the company – and amid red hot demand for corporate debt.
The prior month had been a blockbuster one for high-grade volumes with US$112bn raised – the biggest February on record – and the market was primed for more M&A supply, notably in the pharma sector.
But while market conditions helped, lead bookrunners JP Morgan, Mizuho Securities and Wells Fargo Securities ensured good momentum by starting out with generous new issue concessions of between 25bp and 35bp across all tranches.
The leads kept the buyside focused on returns, with the 10-year paying a 3.8% coupon and the 30-year 4.75% – and the book was ultimately so large they had to hold the deal overnight, in part to work out the allocations.
The most traction was seen at the longer end of the curve, with final pricing on the longer-dated portions between seven and 30 years coming 20bp–25bp inside talk. The concession on the 30-year looked to be just 4bp at the end-result, and the average across all tranches was just 7bp.
The average weighted yield was 3.43%.
To top it off, investors saw the bonds rally in secondary trading by 13bp–18bp – but bankers both involved and away from the deal did not believe Actavis had paid up any more than necessary to get the deal done.