US Markets

CVS manages large debt stack with US$3.5bn bond

Credit: REUTERS/BRIAN SNYDER

CVS Health returned to the US investment-grade market on Thursday with a US$3.5bn issue — its first since it priced the third largest corporate bond of all time last year to fund the acquisition of Aetna.

NEW YORK, Aug 9 (IFR) - CVS Health returned to the US investment-grade market on Thursday with a US$3.5bn issue — its first since it priced the third largest corporate bond of all time last year to fund the acquisition of Aetna.

Since the US$40bn bond funding priced last year, CVS's paper has consistently remained among the most liquid in the secondary market.

But investors have been waiting for the company to attend to its growing debt stack, and Thursday's new issuance goes some way towards achieving those goals.

The retailer and pharmaceutical benefit manager announced a three-part bond to pay down and refinance debts previously issued by the company and inherited from its mergers with Coventry Health Care and Aetna.

CVS (Baa2/BBB) launched a US$1bn five-year, US$750m seven-year and US$1.75bn 10-year at spreads of Treasuries plus 120bp, 140bp, and 165bp, respectively.

While some deals struggled through price progression on Wednesday amid volatility in the markets, CVS managed to tighten spreads 25bp-30bp from initial price thoughts for a new issuance concession of just 2bp-3bp of new issue concessions.

The 10-year tranche, for example, came with a 2bp concession to the curve, where the existing 4.30% 2028 bond had been trading at a G-spread of 160bp on Wednesday, according to IFR calculations.

Proceeds will be used to pay down a US$2bn CVS 3.125% 2020 note and the remaining proceeds will help tender the US$2bn remaining on legacy Aetna 4.125% 2021s and Coventry Health Care 5.45% 2021s.

CVS has US$12.9bn in outstanding bonds coming due between this year and 2021, according to Refinitiv data.

Year-end lease-adjusted leverage is expected to remain high in the 4.7 times range, with the goal of reaching 3.5 times by year-end 2020, according to CreditSights.

But deleveraging is expected to accelerate, especially after CVS reported higher-than-expected operating cashflow forecasts for the year of US$10.1bn-$10.6bn, according to the company's second-quarter earning report released last week.

"Our strong cash projection includes the improvement to our underlying business performance, as well as early benefits from our initiative to reduce pharmacy inventory in our retail stores," Eva Boratto, executive vice-president and chief financial officer of CVS, said on the earnings call.

With that added cashflow, CVS said it will use US$4.5bn-US$4.9bn for debt paydowns this year, which includes the US$3.5bn term loan the company paid down during the second quarter.

"Since the close of the Aetna transaction, we have repaid approximately US$6.6bn of debt, and we are focused on continuing to delever and remain on track with the plans we outlined," Boratto said.

(This story will appear in the August 10 issue of IFR Magazine.)

((william.hoffman@thomsonreuters.com; 646 223 6141;))

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