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Credit Insights

CVS Megadeal Weighs on Investment-Grade Corporate Bonds

The extremely strong employment report released Friday morning overwhelmed any lingering negative investor sentiment from the tariff debates and the resignation of Gary Cohn as director of the National Economic Council. Risk assets traded fairly well through most of the week, but equities soared Friday after it was reported that jobs jumped by 313,000 in February. The S&P 500 rose 3.54% for the week, but half of that increase came on Friday alone, when the index jumped 1.74%. Even though most classes of risk assets rose last week, credit spreads in the investment-grade corporate bond market languished and were generally unchanged as bond investors suffered a little indigestion from the monster $40 billion CVS Health (BBB+/UR-) deal.

This transaction from CVS was the third-largest single-borrower transaction in the history of the corporate bond market. The largest transaction was the $49 billion Verizon (BBB, stable) deal in 2013, in which the proceeds were used to finance the company's wireless assets. The second largest occurred in 2016, when Anheuser-Busch InBev (BBB+, stable) priced $46 billion to fund the purchase of SABMiller. CVS plans to use the proceeds from this transaction to fund its acquisition of Aetna, which is expected to close in late 2018. We placed our rating for CVS under review with negative implications when the acquisition was first announced, as we expect the debt leverage of the combined company will increase to over 4 times.