Walgreens Boots makes junk bond debut
Walgreens Boots hit the bond market last week for the first time since it became a fully fledged junk credit earlier this year.
The pharmacy and healthcare company upsized a five-year non-call two issue to US$750m from US$600m, pricing the deal at par to yield 8.125%, tighter than guidance of 8.25%–8.5% and well below initial talk of the mid-to-high 8% area.
Walgreens raised funding just as the high-yield primary market sprang to life after the selloff early last week, as buyside accounts put money to work. Besides Walgreens, another five issuers launched junk bonds on Thursday.
“Multisector funds have plenty of room to add high-yield,” said a buyside account manager.
Walgreens had been shopping a debt deal earlier in the month to take out an approximately US$1bn bond due in November, but it held off as market conditions deteriorated on Monday, investors said.
The borrower has struggled to bolster earnings in the face of a hefty maturity wall and now must contend with high financing costs in a higher-rate environment and following ratings downgrades over the past year.
“They have to turn the business around, but it is a tough business,” said a second investor looking at last week's bond. “The pharmaceutical part is not generating the margins it once did.”
In December, Moody’s downgraded the credit’s unsecured debt rating to Ba2 from Baa3, and in July S&P cut its rating two notches to BB from BBB–.
With earnings coming below expectations, S&P said last month that it is unclear whether the company can bring leverage below 5x going into 2025 and beyond.
The company has US$2.8bn of debt falling due in fiscal 2026 and another US$1.8bn the following year, and has looked to asset sales to raise capital, according to S&P.
This month, Walgreens announced it had raised US$1.1bn through the sale of its unencumbered shares in drug company Cencora.
But uncertainty over the company’s capacity to meet debt payments left some investors pushing back on the unsecured structure of the latest deal, preferring to have been offered a secured bond instead.
“We are looking for stronger protection,” said the second investor. “You have to ask if they don’t turn things around, how will they deal with these 2026 maturities? They will have to sell assets or turn the business around significantly.”