CVS Bets Big With $40 Billion Bond Sale -- WSJ

03/07/18 02:47 AM EST

Biggest corporate debt offering in over two years to finance acquisition of Aetna

By Matt Wirz 

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (March 7, 2018).

Pharmacy chain CVS Health Corp. sold $40 billion of bonds Tuesday to help pay for its acquisition of health insurer Aetna Inc. months before it needs the money, seeking to get ahead of an expected rise in interest rates and a flood of borrowing across the economy.

The sale, the largest in two years, showed there is still eager demand from investors for corporate bonds issued by financially strong borrowers. But investors and companies say they are bracing for a sea change in the markets caused by shifts in U.S. monetary and fiscal policy that could penalize prospective debt issuers for waiting.

Investors are anticipating a deluge of bond issuance this year. The U.S. Treasury announced it would be selling $42 billion of additional bonds in the period from February through April, and many analysts forecast that the government will announce additional increases to bond sales in May.

Greater availability of bonds could send their prices lower, which results in higher rates. Some analysts and investors expect the additional supply of debt will push borrowing costs throughout the economy higher.

Regulators aren't expected to pass judgment on the $69 billion Aetna purchase until late this year, but CVS issued the debt this week to avoid the risk that interest rates continue to rise, people familiar with the deal said. Another jump in Treasury bond yields could suppress investor appetite for new corporate debt.

Yields on corporate bonds jumped in tandem with U.S. interest rates this year, triggering a fall in bond prices and a decline in overall debt sales. Issuance of investment-grade corporate bonds totaled $217 billion in January and February compared with $256 billion in the same period last year, according to data from S&P Global.

Investors and other prospective borrowers were carefully watching CVS's deal to see if the move in rates had affected the market's capacity to finance outsize takeovers.

"There was a lot riding on this deal," said Drew Conrad, a bond trader for Denver Investments, which manages about $4.5 billion of fixed income. "I think if this deal had gone poorly it would have made it harder for some of these large M&A deals to price debt where they wanted."

CVS paid a slightly higher yield on the debt than is common for new bond sales, attracting hefty demand from investors who placed orders worth about $120 billion, or three times the amount of bonds on offer, people familiar with the deal said. The company will also use $4 billion of cash, a $5 billion loan and stock to pay for the buyout, the people said.

"Having a successful offering for CVS was important for paving the way for some other large borrowers," said Dan Mead, a senior banker at Bank of America Corp. who worked on the deal. "The transaction showed there is still depth for large M&A financings in the investment-grade bond market."

After a relatively slow 2017, M&A activity is heating up, with pending deals including United Technologies Corp.'s $23 billion planned purchase of Rockwell Collins and Bayer AG's $57 billion expected acquisition of Monsanto Co.

Falling interest rates around the world in recent years pushed yield-starved investors to shift from government bonds to purchases of global corporate investment-grade bonds, fueling a record $3.32 trillion of issuance in 2017 as companies rushed to take advantage of low rates, according to data from Dealogic. Foreign purchases of corporate bonds slowed this year as the yield on the benchmark 10-year Treasury note rose by roughly half a percentage point. A Bloomberg Barclays index of the debt has declined 2.86% since Jan. 1.

Investors expect yields to remain higher, as the Federal Reserve raises interest rates and U.S. tax cuts combined with the recent budget agreement create more fiscal stimulus for an already-growing economy.

CVS offered buyers of the new debt a higher yield than that on its current bonds to ensure strong participation. CVS priced a new $5 billion bond due in 2025 to yield about 1.45 percentage points more than comparable U.S. Treasury bonds, roughly 0.15 percentage point more than its existing bonds of similar maturity, according to data from MarketAxess.

The company split the $40 billion financing into seven bonds with repayment dates ranging from two years to 30 years. The 30-year portion, which yields 1.95 percentage points more than underlying Treasurys, will remain outstanding even if regulators reject the Aetna purchase, which would force CVS to buy back most of the debt, investors said.

The company hired five investment banks to jointly arrange the sale: Bank of America Corp., Barclays PLC, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- a larger group than normal to manage its size.

Larger investors willing to hold the debt for an extended time received most of the bonds they ordered, but smaller investors received as little as one-quarter of the bonds they asked for, a fund manager and one of the people familiar with the deal said.

CVS's borrowing for the acquisition would increase its debt load to around 4.7 times earnings before interest, taxes, depreciation and amortization, or Ebitda, from 3.3 times in June, according to Moody's Investors Service Inc.

The company intends to reduce that ratio to around 3.6 within two years by increasing earnings and using excess cash to repay debt, Moody's said.

CVS expects to close the deal in the second half of 2018. Federal authorities reviewing the proposed merger last month asked for more information, pushing back the deadline to rule on the deal. CVS said it anticipated the move and that the process is "progressing as planned." Shareholders for both companies are set to vote on the deal March 20.

CVS shares fell sharply, while Aetna's stock jumped, when The Wall Street Journal first reported the companies were in talks in October. CVS shares are down about 15% from a year ago; Aetna's stock price is up nearly 50% in that time.

--Sharon Terlep and Daniel Kruger contributed to this article.

Write to Matt Wirz at


Corrections & Amplifications

This article was corrected March 9, 2018 at 5:32 p.m. ET because an earlier version garbled Wells Fargo & Co.'s name in the 16th paragraph.

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March 07, 2018 02:47 ET (07:47 GMT)

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