J&J scores lowest spread of year on bonds to help fund $13 billion bid for Shockwave

By Joy Wiltermuth

Wall Street deal-making remains robust despite the Federal Reserve's rate hikes since 2022

Johnson & Johnson sailed through the market on Monday, with a four-part bond to help fund its planned $13 billion acquisition of Shockwave Medical.

The rare AAA-rated debt deal raised $4 billion, while setting the lowest spread paid by an issuer for a 30-year U.S. investment-grade bond this year, at 62 basis points above the risk-free benchmark rate, according to Informa Global Markets.

That means investors will earn a spread of 62 basis points on the bonds, plus the 30-year Treasury rate BX:TMUBMUSD30Y of about 4.63%. Looking further back, International Business Machines Corp.( IBM) in 1997 sold a 30-year bond at a record-low spread of 19 basis points above the risk-free benchmark, according to Informa.

The new financing to help buy Santa Clara, Calif.-based Shockwave (SWAV), a maker of devices used to treat heart disease, will keep Johnson & Johnson (JNJ) "firmly rooted in high-quality" investment-grade territory, despite "talc-related legal overhang" and J&J's management team calling its M&A appetite "voracious," according to Eric Axon's team at CreditSights team, in a Monday client note.

The funding underscores how the Federal Reserve's rate hikes have yet to dull Wall Street's appetite for deal-making.

"You had a hiatus for a little while," said Matt Brill, head of U.S. investment-grade credit at Invesco, of issuance of debt to help finance M&A. "But I think companies are now proceeding as if we are going to be higher for longer" on interest rates. "For now, they are just no longer waiting."

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Aside from J&J and Microsoft Corp. (MSFT), the bulk of U.S. investment-grade companies no longer view top-AAA credit ratings as a necessity, given that credit markets have remained largely open to borrowers, even following periods of stress.

To underscore the point, the spread on the ICE BofA U.S. Corporate Index was last pegged at 89 basis points over the risk-free Treasury rate, or about 10 basis points away from the sector's low of the past 25 years, according to Leslie Falconio, head of taxable fixed-income strategy at the chief investment office of UBS Global Wealth Management.

This year's front-loaded supply of corporate bonds has been met by robust investor demand, even as the Fed repeatedly dialed back market expectations for rate cuts, fueling wild swings in U.S. bonds.

Yields on J&J's outstanding bonds have climbed since the beginning of the year, along with benchmark Treasury rates, elevating bonds maturing 16 years or longer above 5% yields, according to BondCliQ Media Services.

U.S. companies, meanwhile, have been no strangers to M&A, with February alone seeing almost $55 billion in related investment-grade bond supply, with $9.4 billion in March and $8.1 billion in April, according to a tally from BofA Global.

The recent wave is part of an estimated $429 billion investment-grade pipeline of M&A funding deals through April.

J&J didn't immediately respond to a request for comment. The company ended the first quarter with $26.2 billion in cash and related short-term investments, "providing significant flexibility in deal financing," according to CreditSights.

Stocks SPX DJIA closed mostly lower Monday, but still near record territory, while the benchmark 10-year Treasury yield BX:TMUBMUSD10Y was slightly lower, near 4.49%, according to FactSet. Shares of J&J advanced by 0.9%, while those of Shockwave fell less than 0.1%.

-Joy Wiltermuth

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05-13-24 1727ET

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