Shire readies up to US$12bn M&A bond

By Hillary Flynn

NEW YORK, Sept 16 (IFR) - Drugmaker Shire (Baa3/BBB-) is readying an up to US$12bn M&A bond, the next test for the corporate bond market that has proved resilient in the wake of volatility.

The London-listed group told buyside accounts on roadshows this week that it wanted to raise between US$10bn-US$12bn to fund its US$32bn cash and stock offer for US-based Baxalta (Berlin: 9BX.BE - news) .

The deal, which could come as soon as Monday, is likely to be sold entirely in the US high-grade market, though the company hasn't discounted issuing in another currency as well.

A bond sale of this size should be well received in what remains an active primary market in the US, where US$93.32bn of the US$130bn syndicate desks were forecasting for September has already been placed.

The market has absorbed the heavy supply well, but some buyside accounts say they may need some compensation for the risks on this particular deal.

Concerns have been raised about leverage, which Moody's said in January would jump to around 5.1x on a gross debt/Ebitda basis following the Baxalta acquisition.

The company told investors on calls this week that it plans to deleverage quickly and will raise the bulk of the bond financing with tenors of 10 years or less.

But Shire's plan to buy back US$10bn of shares over the next two years has only riled creditors eyeing the bond deal.

"Shire (Xetra: S7E.DE - news) enhanced shareholder value at the same time it's increasing leverage," said one buyside account. "All of which adds to the amount of risk for bondholders. We need to make sure we are compensated for that risk."

Against that backdrop, Shire may have to come with higher new issue concessions than other recent M&A bond fundings in the pharmaceutical sector, argued a syndicate manager away from the deal.

Mylan (Hamburg: 27249935.HM - news) (Baa3/BBB-/BBB-) paid a NIC (NasdaqGS: EGOV - news) of anywhere from flat to 10bp on its US$6.5bn multi-tranche issue in May, while Teva (Baa2/BBB) enjoyed negative concessions across the board on its US$15bn trade in July.

Teva's new 10-year was trading at a G-spread of 150bp on Friday, while Mylan's 10-year bond was being spotted at a G-spread of 209bp, according to MarketAxess.

Another investor was looking at pharmaceutical companies Allergan (NYSE: AGN - news) and Celgene (Swiss: CELG.SW - news) as comps, calculating that Shire should come 5-10bp back to the former and 15-20bp wide to the latter.

Ten-year bonds issued by Allergan and Celgene were respectively trading on Friday at G-spreads of 152.2bp and 144.4bp, according to MarketAxess.

Bank of America Merrill Lynch, Barclays (LSE: BARC.L - news) and Morgan Stanley (Xetra: 885836 - news) are bookrunners on the deal. (Reporting by Hillary Flynn)