NEW YORK, Sept 23 (IFR) - Investors piled into the debut bond from Shire this week, ignoring some clear warning signals that the drugmaker’s deal might have offered a little bit less than meets the eye.
For months, the buyside has seemed to have more cash than it knows what to do with, a scenario that has propelled the US high-grade primary to issuance record after issuance record.
But Shire’s deal raised eyebrows even in a market that takes every trade’s success for granted, easily crossing the line despite the company’s debt plans appearing rather optimistic.
The US$12.1bn trade amassed a US$28.5bn order book, even as analysts were noting that Shire’s debt-to-Ebitda ratio had jumped from less than one time to more than seven times in 12 months.
Analysts at GimmeCredit were fairly blunt in their appraisal.
“We do not believe the new issue offered sufficient spread to reward investors for taking these risks,” they said. “It’s a total shot in the dark.”
Proceeds will help finance Shire’s US$32bn hostile takeover of rival Baxalta, and some of the buyside demand could be put down to investor appetite for all things pharma.
But Shire, hovering just above junk territory with its Baa3/BBB- ratings, managed to get the deal away at extremely tight levels, with a weighted average coupon of just 2.59%.
The four-part deal comprised 1.90% 2019s, 2.40% 2021s, 2.875% 2023s and 3.20% 2026s that priced at Treasuries plus 100bp, 120bp, 135bp and 150bp, respectively.
Leads were able to tighten up to 30bp on some tranches from the top of the IPT range and ultimately landed the deal flat to the curve.
For a debut issuer walking the border of junk - and one with significant leverage levels to boot - the result was nothing short of extraordinary.
Many investors were clearly unfazed by, or uninterested in, any discussion of trouble.
“We just reduced our potential exposure,” said one investor who had to settle for a smaller than expected allocation given the surge of demand.
“But it’s good to have some Shire bonds.”
The secondary market did not entirely agree with that assessment, as the new 2026s were trading flat at 150bp on Friday, according to data from MarketAxess.
Shire has been on a US$50bn acquisition frenzy over the past three years, snapping up Dyax, NPS and ViroPharma in addition to its headline-grabbing purchase of Baxalta.
The buying spree has given the pharma giant a vast arsenal of potentially successful drugs that could spell market domination for years to come.
But the push to expand has driven up leverage to a point that many in the market doubt the company can live up to its ambitious deleveraging targets.
Shire says not to worry, promising that it will get leverage down to two to three times by the end of 2017. Many find that unrealistic.
“Maybe they can reach that [leverage goal] in 2018,” said Michael Zbinovec, senior director at Morningstar. “We’re a bit more skeptical.”
Carol Levenson, an analyst at GimmeCredit, said that on a trailing 12-month basis, the company’s debt had risen by June 30 from just US$2.3bn to US$24bn after buying Baxalta and Dyax.
Levenson accused the ratings agencies of giving Shire a “free pass” and said that she saw gross leverage at best being cut to around 2.5 times - and that is not until 2018.
She said the new bonds were likely to underperform debt from other credits in the sector such as Teva, which raised US$15bn through a six-part bond in July to fund its acquisition of Actavis.
“Its lack of a track record with regard to debt reduction weighs heavily in our analysis of relative value,” she said. (Reporting by Hillary Flynn; Editing by Marc Carnegie and Paul Kilby)