US Bond and North America Investment-Grade Corporate Bond: CVS Health's US$40bn nine-tranche bond

IFR Awards 2018
3 min read
John J. Doran

It was big, bold, complicated – and a blowout deal.

Facing regulatory challenges, market volatility, rising rates, and doubtful investors, drugstore chain CVS Health’s US$40bn nine-part jumbo US dollar bond issue to back the acquisition of health insurer Aetna set a record, a precedent for pricing, and was the US high-grade market’s third biggest issue ever.

The deal was also seen as a turning point for the M&A market.

The order book reached US$120bn at one point, with proceeds earmarked to fund CVS’s US$69bn acquisition.

The March 6 deal repositioned a retail company into the healthcare business, offered a new model for healthcare, and pre-funded a deal before regulatory approval, with a unique compensation plan for investors if the takeover went south.

Bank of America Merrill Lynch, Barclays, Goldman Sachs and JP Morgan were active bookrunners.

“This was the first jumbo deal to be pricing in a choppy market environment, well into a Fed hiking cycle,” said Barbara Mariniello, head of Americas debt capital markets at Barclays. “You had a lot of uncertainty about whether you can get another one of these jumbo deals done.”

For starters, investors initially were unhappy with the special mandatory redemption clause, which set a predetermined price that investors would receive if the acquisition failed to complete.

Restructuring the clause would not work for CVS, so the banks involved decided to offer investors a discount on some of the tranches, giving them greater compensation.

Investors hailed it as a breakthrough, with CVS breaking with tradition of pricing M&A bonds closer to par.

Each of the selected tranches would see CVS buy back the bonds at a cash price of 101 under the SMR clause if the Aetna deal failed.

Investors claimed the move was a big win for the buyside, and said they expected it to be the mould for companies going forward.

“This was a way that we thought elegantly threaded the needle,” said Mariniello. “Investors were happy with it and the company was happy with it as it allowed us to price more efficiently.”

In October, the Department of Justice approved the merger.

In the end, final order books for the deal, rated Baa1 by Moody’s and BBB by S&P, were a record US$114.6bn.

Even with the threat of a trade war and sinking stocks rattling markets, after the sale CVS bonds managed to trade in the secondary tighter than where the offering was priced.

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