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As the economy grows, so do large debt offerings

By Michael Moreau, Midwest IM Consultant
Mar 15, 2015

On March 3, Actavis sold the second largest corporate bond offering in history ($21 Billion). This massive debt issuance for Actavis is helping the generic drug company finance the acquisition of Allergan ($66 Billion), a global healthcare company focusing on specialty pharmaceutical (Botox) and medical device segments.

As treasuries remain at historic lows debt investors are quickly buying income generating corporate issuances due to higher yields. The Actavis bond sale received roughly $90 million in investor orders. Other large debt issuances in past year include Merck’s $8 Billion issuance to buy Cubist Pharma, Medtronic’s $17 Billion to acquire Covidien, and Microsoft’s recent $10.75 Billion issuance for share repurchases. These large issuances may continue as the economy grows and central banks keep policy rates low.

Large corporate bond issuances are highlighting investors’ positive outlooks for the economy, especially in the United States. In the case of Actavis, Medtronic, and Merck, the issuance is used for large acquisitions. For the case of Microsoft and Apple, the debt offering will be used for share repurchases. Both of these are viewed as positive signs for the economy. These large corporate offerings are important for analysts that cover a particular company issuing debt, a fixed income portfolio manager looking to identify new investment opportunities, or even a credit analyst determining if the company will be able to pay off the newly issued debt. However, issuing debt is risky for not only the issuer but the investor. If a company doesn't have proper cash management tools in place, creditors can force the company to sell assets to repay the money. The more debt relative to equity, the greater the risk of bankruptcy. Another factor that will impact large debt offerings is the Federal Reserve’s potential interest rate hike, making these securities less attractive.

In the case of Actavis’ senior notes, Moody’s assigned the securities a Baa3 rating. This is a positive rating, driven through Actavis full pipeline, solid cash management, and little patent risk for its products. The rating was grounded by Actavis’ appetite for growth through acquisition (fourth large acquisition in the last five years) and a significant increase in leverage that will decrease ratios such as debt/EBITDA.

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