Teva Pharmaceutical Industries today confirmed widespread market expectations that a much-anticipated blockbuster debt offering backing its $40.1 billion acquisition of Allergan’s generics business, Actavis Generics, may be only days away.
Teva CEO Erez Vigodman said today on a 2016 updated guidance call that management is “closely monitoring the corporate bond markets” for a potential acceleration of the bond deal, “given the very attractive terms currently prevailing there.” (Notably, Walt Disney last Thursday printed the lowest-ever coupons for 10- and 30-year debt, while Molson Coors Brewing on June 28 garnered the lowest 30-year coupon by a BBB–/Baa3 issuer, according to LCD, an offering of S&P Global Market Intelligence.)
Teva officials said on today’s call that the only remaining obstacle to the deal closing is clearance from the Federal Trade Commission (FTC), which “could come at any time.” The company today also filed a Form F-3 post-effective amendment with the SEC, citing current estimates for the acquisition close to “occur shortly.”
According to reports, Teva has tapped BAML, Barclays, BNP Paribas, Credit Suisse, HSBC, and Mizuho for fixed-income calls in the U.S. through tomorrow, followed by presentations in Europe Monday and Tuesday, as the company eyes issuance in denominations potentially including U.S. dollars, euros, and Swiss Francs.
But the total size of the bond offerings may also be smaller than expected. Teva said today that the net cost of the acquisition has shrunk by $5 billion, to $35.1 billion, based on a substantially higher-than-expected $2.9 billion of upfront proceeds this year from mandated asset divestitures to garner regulatory approvals (Teva last year envisioned shedding only about $400 million of assets), $1 billion from a working capital adjustment and proceeds from a sale of products back to Allergan, and $1.5 billion from a change in the expected equity value.
The lower cost necessitates less in debt financing, the company said today. Deal financing needs started at $27 billion last year, and are now roughly $23 billion, including the $5 billion of A term loans ($2.5 billion due November 2018 and $2.5 billion tranche due November 2020) inked late last year, alongside a $4.5 billion senior unsecured revolver. Net debt at closing is now seen at roughly $34 billion, or $4 billion less than initial company projections last year, and that suggests that Teva may shop a long-term debt package below widespread expectations in recent weeks for total issuance in the neighborhood of $20 billion.
Teva expects to slash its net financial debt leverage over the next few years via the deployment of its roughly $25 billion of projected cumulative free cash flow through 2019, including the $2.9 billion of upfront asset-divestiture proceeds, and reflecting expectations for a ramp higher in free cash flow from $4.9 billion last year, to $7.2–7.8 billion annually by 2019.
However, Fitch in April cautioned that “elevated debt leverage may linger somewhat” following the acquisition, as the company has stated that it intends to stay on the hunt for M&A opportunities over the medium-term. But Fitch does expect leverage—which it sees spiking to more than 4x pro forma for the deal close, from 1.5x at the end of 2015—to ebb near 3x over the next two years as it repays 2016–2017 debt maturities and term-loan obligations, keeping Teva comfortably in compliance with credit agreement covenants.
(The term loans include a leverage test set at 5.25x, stepping to 5x two quarters after closing, and then to 4.25x two quarters after that, and to 4x two quarters after that, and then to 3.5x thereafter. The term loan is also covered by an interest-coverage test.)
While ratings agencies are reviewing all three sides of the present BBB+/Baa1/BBB+ profile for downgrade, all three agencies have stated in recent months that downgrades are likely to be limited to one notch.
Teva has not tapped the U.S. markets for long-term debt financing since December 2012, when it placed $2 billion of senior notes across $700 million of 2.25% long seven-year notes due March 18, 2020 at T+110, and $1.3 billion of 2.95% 10-year notes due Dec. 18, 2022 at T+125. Proceeds of that offering backed the repayment of debt associated with its $6.8 billion acquisition of Cephalon in 2011, which necessitated the issuance that year of $5 billion of notes in six parts.
Teva debt has held steady through the expectations for large-scale issuance. The 3.65% notes due November 2021, which date to that 2011 bond offering as a 10-year deal at T+170, changed hands today at T+132 versus the five-year Treasury rate, or the firm end of a trading range from T+130–150 in recent weeks, with the wider levels corresponding with the rout of global credit markets late last month on the shattering Brexit outcome, trade data show. — John Atkins
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