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CVS Health launches $15B M&A bond as deal sizes creep higher

CVS Health (NYSE: CVS) today launched a $15 billion offering of SEC-registered senior notes backing its planned acquisitions of Omnicare and the pharmacy and clinic businesses of Target, sources said.

The offering is just the eighth since the start of 2012 to total $15 billion or more, including deals this year for Actavis Funding ($21 billion on March 3), AT&T ($17.5 billion on April 23), AbbVie ($16.7 billion on May 5), and Charter Communications ($15.5 billion last week), all of which also backed blockbuster M&A plays, LCD data show.

For reference, last year produced just one offering of $15 billion or more, a $17 billion late-year deal for Medtronicon Dec. 1 for its acquisition of Covidien.

Spreads for today’s deal were set firm to guidance ranges established five basis points on either side of midpoints, after an initially proposed three-year floating-rate tranche was dropped from the structure. The deal was set across $2.25 billion of 2018 notes at T+85 (guidance T+90 area from initial whispers in the T+110 area), $2.75 billion of 2020 notes at T+110 (guidance T+115 area from initial whispers in the T+130 area), $1.5 billion of 2022 notes at T+135 (guidance T+140 from initial whispers in the T+155 area), $3 billion of 2025 notes at T+155 (guidance T+160 from initial whispers in the T+170 area), $2 billion of 2035 bonds at T+175 (guidance T+180 area from initial whispers in the T+205 area), and $3.5 billion of 2045 bonds at T+190 (guidance T+195 area from initial whispers in the T+215 area), sources said. Press reports earlier today suggested an order book cover of roughly three times the proposed offering amount.

CVS bonds have traded wider since the acquisition announcements this spring, and continued wider today in the context of high new-issue concessions built into the talk levels. CVS 3.375% notes due August 2024, which printed last August at T+105, traded more than 20 bps wider in May at levels roughly 15 bps above issuance. The issue changed hands on Friday at T+126 as participants braced for today’s offering and in the T+140 area today, trade data show. The company’s 5.3% 30-year notes due December 2043 traded on Friday at date-adjusted levels in the low T+170s and today in the T+185-190 range, or up from pricing at T+145 in December 2013.

Bookrunners for today’s offering are Barclays, BNY Mellon, J.P. Morgan, and Wells Fargo.

All but the proposed 2025 issue are subject to a special mandatory redemption at 101, in the event the Omnicare acquisition is not completed by Aug. 20, 2016. The notes, which are guided to a BBB+/Baa1 profile (stable on both sides), are also subject to ratings-sensitive, change-of-control puts at 101.

The fixed-rate notes are subject to make-whole call provisions. Par calls apply for the 2020 notes from one month prior to maturity, for 2022 notes from two months prior to maturity, for 2025 notes from three months prior to maturity, and for 2035 and 2045 bonds from six months prior to maturity.

CVS in May secured a $13 billion unsecured bridge loan from Barclays in connection with its planned $12.7 billion acquisition of BB/Ba3 Omnicare (NYSE: OCR), including the assumption of roughly $2.3 billion of Omnicare debt. CVS stated at the time that it expected to print “permanent financing” in the form of senior notes and/or term-loan debt prior to the closing of the transaction, which is expected near the end of 2015.

CVS subsequently announced that it would acquire the pharmacy and clinic businesses of Target (NYSE: TGT) for roughly $1.9 billion.

S&P and Moody’s affirmed ratings after the M&A plays. “In our view, the [Target] transaction will allow CVS to expand its pharmacy network and strengthen its retail presence in new markets, while driving incremental sales and prescription volumes,” S&P stated on June 15. In May, it said that the Omnicare deal would not lead to a material change in overall financial risk, “given CVS’ demonstrated ability to reduce debt leverage with excess cash flow.”

However, Moody’s noted on the same day that the rapid-fire acquisition activity left CVS “weakly positioned” in the Baa1 category, though it in May characterized the larger Omnicare play a net credit positive. – John Atkins

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Charter places record-setting $15.5B bonds for acquisitions as cable industry consolidates

Charter Communications (Nasdaq: CHTR) yesterday placed a $15.5 billion benchmark offering of 144a/Reg S senior secured notes (with registration rights) after garnering a strong order book, as it seeks funds to complete the acquisitions of Time Warner Cable (NYSE: TWC) for roughly $80 billion, including the assumption of $22 billion of net debt, and Bright House Networks for more than $10 billion.

For reference, the deal is the fourth largest so far this year, behind M&A-driven deals for Actavis Funding ($21 billion on March 3), AT&T ($17.5 billion on April 23), and AbbVie ($16.7 billion on May 5). The only other larger offerings in recent years were printed by Verizon Communications ($49 billion in September 2013), Medtronic ($17 billion in December 2014), and Apple ($17 billion in April 2013).

Only three deals were printed in 2014 at sizes of $10 billion or more, versus nine offerings so far this year, all backing M&A or share buybacks.

Yesterday’s offering comes via Charter’s subsidiary CCO Safari II, LLC, an entity formed to pre-fund transaction financing. Proceeds will be placed in escrow until closing of the deals.

At the closing of the transaction between CHTR and TWC, the notes will be assumed by Charter’s subsidiaries, Charter Communications Operations and Charter Communications Operating Capital, according to the company. The deal is subject to a special mandatory redemption, at 101, in the event the TWC acquisition is not consummated by May 23, 2016, but is not subject to the closing of the Bright House play.

Yesterday’s offering was launched at guidance numbers, and 5-15 bps through initial whispers, but only in the context of high new-issue concessions amid cautious market tone and M&A-related leverage implications for yesterday’s blockbuster deal.  For reference, yesterday’s 30-year issue was set at T+335, versus indications for TWC’s outstanding 4.5% Sept. 15, 2042 issue yesterday at date-adjusted levels near T+300, or roughly 20 bps wider since the announcement of mandates for the new bond offering earlier this week.

The offering is on track for eligibility for IG indices under an expected BBB-/Ba1/BBB- profile as ratings review continue. Charter ratings are expected to rise from prior assignments at BB- at S&P and Ba3 at Moody’s, and consolidate with ratings at Time Warner Cable, which is currently rated BBB/Baa2.

Fitch and S&P yesterday rated the notes under an assumption of leverage in the high 4x to 5x area pro forma for the TWC and Bright House transactions. Fitch assessed Charter’s leverage at 4.4x at the end of March, in the context of Charter’s total leverage target between 4x and 4.5x. “Fitch recognizes that a large portion of the TWC transaction will involve senior secured debt, both existing at TWC and new issuance. Charter recently stated that it expects to maintain a senior leverage target of 3.5x following the completion of the TWC and Bright House transactions. Depending on the ultimate capital structure, a one or two notch upgrade of Charter’s IDR and existing ratings could be possible provided that pro forma senior secured leverage is at or below 4.0x and total leverage does not exceed 5.0x,” Fitch stated yesterday.

Fitch added that it views both acquisitions positively, and expected them to result in a stronger consolidated debt profile. – Staff reports

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US high yield ETF inflows outweigh modest outflows from mutual funds

 

HY Inflows July 9 2015

There was a net $45 million inflow to U.S. high-yield funds in the week ended July 8, following the whopping $3 billion outflow the week prior, according to Lipper.

 

However, the net inflow this week represents a $260 million withdrawal from mutual funds overfilled by an inflow of $306 million to the ETF segment, versus almost equally outflows from both fund spaces last week.

 

Regardless of what that suggests about fast money, hedging, and market timing, it’s the second such negative correlation in that manner in three weeks, as the week ended June 24 had $668 million of mutual fund withdrawals overpowered handsomely by inflows of $1.3 billion to ETFs.

 

The net inflow moderates the trailing-four-week reading to negative $1.3 billion, from negative $2 billion last week. Recall that last week’s observation was the deepest in this measure since the week ended Aug. 13, 2014, or 39 weeks ago.

 

The net inflow does little to the full-year reading to inflows of $1.3 billion, with negative 32% ETF-related. Last year, after 27 weeks, there was a net $6.7 billion inflow, with 18% related to ETFs.

 

The change due to market conditions this past week was negative $1.1 billion. That’s just about 0.6% against total assets, which were $196.5 billion at the end of the observation period. ETFs account for $35.1 billion of total assets, or roughly 18% of the sum. – Matt Fuller

 

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.

 

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GM Financial shops bond deal as high-grade debt issuer

Rising-star credit General Motors Financial is in market with an SEC-registered benchmark offering of five-year notes, in fixed- and floating-rate formats, and 10-year fixed-rate notes, sources said. Initial whispers for the fixed-rate issues started in the areas of T+185 and T+220, suggesting reoffers near 3.35% and 4.45%, respectively.

For reference, the issuer one year ago, on July 7, 2014, placed $1.5 billion of senior notes under a high-yield BB-/Ba2/BB+ profile, including 3.5% five-year notes due July 2019 at T+176.5. That issue changed hands yesterday at a tighter G-spread equivalent of T+153, trade data show.

But the unsecured debt of the issuer now qualifies for inclusion in high-grade index runs, after an upgrade of parent General Motors (NYSE: GM) and General Motors Financial by Fitch on June 18 to BBB-, from BB+. Today’s issue is guided to a split BBB-/Ba1/BBB- profile, including stable outlooks on all sides.

Fort Worth, Texas-based General Motors Financial was previously known as AmeriCredit, and still provides sub-prime loans to non-GM dealers under the AmeriCredit banner, according to S&P.

“The upgrade of GM’s ratings reflects the ongoing fundamental improvement in the company’s core business over the past several years,” Fitch stated in last month’s upgrade rationale. “At the same time, recent events pertaining to last year’s recalls have given Fitch increased confidence that the company has the financial flexibility to navigate the remaining issues while maintaining an investment-grade credit profile.”

“GM’s leverage remains low for its rating category, despite its issuance of $2.5 billion in senior unsecured notes last fall and the company remains in a strong net cash position. Fitch expects the company’s liquidity position to remain strong, especially given its $20 billion minimum automotive cash target,” Fitch analysts said.

Proceeds of today’s offering will be added to general funds, to be available for general corporate purposes, filings show.

Bookrunners for today’s offering are Barclays, BNP Paribas, Commerzbank, Mizuho, and Morgan Stanley. The notes are guaranteed by the issuer’s principal United States operating subsidiary, AmeriCredit Financial Services (AFSI).

The five- and 10-year fixed-rate issues are subject to make-whole call provisions until the notes are callable, at par, from one and three months prior to maturity, respectively, filings show. – John Atkins

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High yield bond prices decline over past week, led by California Resources

The average bid of LCD’s flow-name high-yield bonds fell 19 bps in today’s reading, to 99.59% of par, yielding 6.81%, from 99.78%, yielding 6.80%, on June 30. The reading was mixed, with seven gainers, three decliners, and five issues unchanged.

The decline in the average bid reflects the influence of California Resources’ large 5.75-point drop since last Tuesday on plummeting oil prices. Recall that California Resources was also the biggest decliner in the reading a week ago, dropping 4.25 points. There was no reading last Thursday due to the July 4 holiday.

Today’s dip extends last Tuesday’s 94 bps drop, for a week-over-week decline of 112 bps. Going back two weeks, the average bid is down 82 bps, with the slide widening to 210 bps over the past four weeks. Volatile underlying U.S. Treasury rates were at hand then, while today’s reading is tied to a drop in commodity prices and global market uncertainty related to Greece, China, and Puerto Rico. The average bid sits at positive 390 bps for the year to date.

Recall that prior to sample revisions at the start of the year, the average bid had plunged to a three-year low of 93.33 on Dec. 16. However, with a snap-back rally that followed, the average bid closed the year at 96.4, for a total loss of 536 bps in 2014.

With today’s decline in the average bid price, the average yield to worst advanced just one basis point, to 6.81%, and the average option-adjusted spread to worst widened 15 bps, to T+532. On a week-over-week basis, the average yield to worst is up 23 bps and the average option-adjusted spread to worst is up 43 bps.

Today’s reading in the flow names is wider than the broad index yield and spread. The S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed yesterday with a 6.43% yield to worst and an option-adjusted spread to worst of T+498.

For further reference, take note that a June 24, 2014 reading of 106.98 – close to the February 2014 market peak of 107.03 – had the flow-name bond average yield at 5.02%, an all-time low, but spreads weren’t quite there. Indeed, the average yield was 7.63% at the prior-cycle peak in 2007, and the average spread at the time was T+290.

Bonds vs. loans
The average bid of LCD’s flow-name loans increased 16 bps in today’s reading, to 99.61% of par, for a discounted loan yield of 4.14%. The gap between the bond yield and discounted loan yield to maturity stands at 267 bps. – Staff reports

The data:

  • Bids fall: The average bid of the 15 flow names fell 19 bps, to 99.59.
  • Yields rise: The average yield to worst advanced one basis point, to 6.81%.
  • Spreads widen: The average spread to U.S. Treasuries gained 15 bps, to T+532.
  • Gainers: Seven constituents were higher, with Hexion Specialty 6.625% notes due 2020 leading with a gain of three quarters of a point, to 92.75.
  • Decliners: Of the three decliners, California Resources 6% notes due 2024 saw the biggest drop, losing 5.75 points, to 80.50.
  • Unchanged: Five of the constituents were unchanged.
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Investors pull $3B from high yield mutual funds and ETFs in week ended July 1

 

Investors pulled roughly $3 billion out of U.S. high-yield funds during the week ended July 1, which represents the largest outflow since mid-December, according to Lipper. The withdrawal reflects $1.3 billion in outflows from mutual funds and $1.6 billion in outflows from ETFs. The latest reading follows a $621 million inflow in the previous week, but contributes to the two sizable outflows recorded in the middle of June.

 

Indeed, the combined outflow from the start of June through yesterday is $8.4 billion. The trailing-four-week average widens to negative $2 billion, from negative $1.1 billion last week, and negative $1.2 billion two weeks ago.

 

The net outflow drops the full-year reading to inflows of $1.2 billion. Last year, after 26 weeks, there was a net $6.6 billion inflow, with 19% related to ETFs.

 

The change due to market conditions this past week was in the red, at negative $681 million. That’s roughly -0.34% against total assets, which were $199 billion at the end of the observation period. ETFs account for $36.5 billion of total assets, or roughly 18% of the sum. –  Joy Ferguson

LIPPER July 1 2015

 

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High yield bond, loan markets in Europe largely resilient to Greek ‘No’ vote

Despite a resounding ‘No’ vote in the Greek referendum, which saw the country’s people vote against further austerity, the reaction in European loan and bond markets has largely been orderly and contained. The vote has however ushered in a further period of political uncertainty and economic volatility in Europe, with issuers having to wait and see how the situation develops before coming to market with new deals.

In the aftermath of the vote, Greek finance minister Yanis Varoufakis resigned. His replacement will be instrumental in the talks that will now ensue as Greece grapples with how to maintain liquidity in its banking system, and the EU ponders how to prevent (or in a worst-case scenario, manage) the country’s exit from the euro. There is much at stake, with concerns that despite stringent capital controls instigated last week, ATMs across the country may soon run out of cash.

The market’s reaction today was more muted than a week ago when the referendum was announced, with the iTraxx crossover widening by 15 points this morning to 342, and the FTSE 100 and Eurostoxx 50 shedding roughly 42 points and 58 points, respectively. “The market doesn’t seem to care. It’s less of an event than last Monday, after Tspiras called for the referendum. Even euro/dollar is not doing much,” said one investor.

The sovereign bond market followed suit, with 10-year yields on government paper from Italy, Spain, and Portugal widening by 11-14 bps. Greek 10-year bonds widened by 257 bps. Meanwhile the 10-year Bund yield tightened by five basis points, to 74.

High-yield corporates slipped 0.5-2 points across the board in early trading, while Greek-related names were more heavily hit.PPC’s 4.75% notes due 2017 were the biggest losers, down nine points, while Hellenic Petroleum’s 8% notes due 2017 fell seven points. OTE bonds, often a proxy for sovereign risk during a crisis, were also hit – the borrower’s 7.875% notes due 2018 fell six points, while its 3.5% notes due 2020 fell five points.

Loan markets have also been hampered by the volatility, and are likely to remain moribund as issuers wait to see how the Greek situation plays out. “We’ll be gazing at our navels for the next few weeks,” said one arranger. “We can’t post on pricing. There is a market, but we don’t know where it is. The market’s not closed, because there are buyers – there just aren’t any sellers. Why would anybody issue in this market?”

There are investors out there with cash, and there are also several deals ready to launch, the largest of which is the LBO financing for glass-bottle business Verallia, which is expected to total roughly €2 billion of loans and bonds. The transaction, led by BNP Paribas, Credit Suisse, Deutsche Bank, Nomura, Société Générale CIB, and UBS, was understood to be ready to launch if the Greeks had voted ‘Yes’ in the referendum, and the arrangers could still look to de-risk via an early bird phase among select lenders, rather than be on risk for the entire financing over what could be a volatile summer.

The lack of visibility may also affect the launch of expected deals from GFKL Financial Services and Motor Fuel Group, which sources say has been shown to investors already.

In bonds, DufrySynlabs, and Center Parcs remain in the pipeline, while pre-marketing took place for a small U.K. company last week, sources said.

In the CLO market, hopes that a ‘Yes’ vote would offer a window of opportunity for those looking to price transactions ahead of the summer lull were dashed by the results of yesterday’s poll, and arrangers and investors are now busy collating investor feedback, and assessing appetite and likely price levels. However, the ‘No’ vote means new-issue activity could now be on hold until September. Carlyle via Citi, and Pramerica via Credit Suisse were among those looking to price imminently, with another handful behind them, sources say.

As reported last week, this situation may or may not be a problem for CLO managers with warehouses open – depending on the make-up of that warehouse and the future direction of the secondary market. Any significant sell off in secondary in the coming weeks raises the potential for warehouses to go underwater, but a warehouse comprising mostly primary assets bought at par or a discount will be better able to withstand secondary weakness than one constructed via secondary market purchases at par and above. Indeed for those starting to ramp new transactions, the current conditions – a mix of better M&A loan supply, a halt in repricings and spread compression, and volatility – may be ideal in terms of generating a strong equity performance. – Staff reports

 

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LCD Daily HY Bond Index Report: Data for July 1, 2015

The S&P U.S. Issued High Yield Corporate Bond Index tracks U.S.-dollar-denominated high-yield bonds issued by U.S.-domiciled companies and includes ratings-based sub-indices. Observations below are as of the most recent close, the prior close, a week ago, and a year ago. The data is courtesy of S&P Dow Jones Indices. Further details can be found online at http://bit.ly/1jm5vGs.

S&P US Issued HY Index July 1