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 UnitedHealth (A3/A+/A-), which is using proceeds to fund its
US$12.8bn purchase of pharmacy benefit manager Catamaran, was able
to tighten pricing 20bp-25bp from start to finish.
Even so the eight-part deal still left investors feeling that they
were being compensated for global event risks and the heavy supply
from the sector, which has seen a raft of M&A.
"We are in a period now where liquidity is important and there is a
lot of uncertainty ahead of the fall and expectations of a rate
hike," said Matt Duch at Calvert Investments.
"So I don't think now is the time to get greedy."
The bid for well-telegraphed jumbo M&A transactions is expected to
last, as investors find space for the relatively large tranches that
typically come with acquisition financing.
"If you are a portfolio manager looking for liquidity, these M&A
transactions do that," said a syndicate banker away from the deal.
"That is why there is demand."
It didn't hurt that UnitedHealth is also seen as one of the stronger
names in the healthcare space.
"Of all the consolidation going on in the sector, it is in our view
one of the best in-class names," said Shubhomoy Mukherjee, a
healthcare strategist at Barclays.
"They don't need to do large M&A transactions to maintain their
growth momentum."
All these factors helped UnitedHealth, which in the end came with
new issue concessions of 5bp-15bp depending on the tranche,
according to bankers away from the deal.
That essentially falls in line with last week's jumbo trades from
CVS Health and PepsiCo, which offered concessions of 10bp-15bp.
In the end, UnitedHealth launched a US$750m 18-month floater at
Libor plus 45bp, a US$750m two-year at Treasuries plus 75bp, a
US$1.5bn three-year at plus 85bp, a US$1.5bn five-year at 100bp
over, a US$1bn seven-year at 125bp, a US$2bn 10-year at plus 140bp,
a US$1bn 20-year at 150bp over and a US$2bn 30-year at 165bp.
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The concessions seem reasonable to bankers in light of current
concerns.
"The sector has come under pressure from supply overhang and event
risk," said a banker away from the trade. "But the market as a whole
has softened since December."
Other health insurance entities have been on an M&A spree of late,
with Aetna making a US$33bn bid for rival Humana and drawing the
interest of regulators concerned about what this means for
competition.
Earlier this year UnitedHealth also sought to make a bid for Cigna -
a company that has also been targeted by Anthem.
"We believe UnitedHealth's bonds should probably trade between the
A- and BBB+ rating categories, given its increasing financial
leverage," wrote a Morningstar analyst today.
While leverage does go up meaningfully, Barclay's Mukherjee says,
the company plans to reverse some of that by suspending its share
buyback program and paying down debt with free cashflow.
(Reporting by Paul Kilby; Additional reporting by Mike Gambale;
Editing by Shankar Ramakrishnan and Marc Carnegie)
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