By Mike Cherney
Pharmaceutical company Actavis PLC is expected to sell more than
$20 billion in bonds as early as this week, a deal that would rank
as the second-largest corporate bond ever and further propel bond
sales this year into record territory.
Traders expect the bonds to fly off the shelves, with investors
globally searching for income-generating investments at a time of
low rates on safe government debt. Actavis, which has
investment-grade ratings, needs the cash to help pay for its $66
billion purchase of health-care firm Allergan Inc.
The sale would rank behind only a $49 billion debt deal from
Verizon Communications Inc. in September 2013 and ahead of $17
billion deals from Medtronic Inc. and Apple Inc. It would also beat
out a $10.75 billion sale from Microsoft Corp., which ranks as the
largest investment-grade U.S. bond deal this year. Actavis declined
to comment.
Overall, investment-grade companies have sold roughly $203
billion of bonds in the U.S. this year, the fastest pace since
2009, recent figures from data provider Dealogic show. Analysts had
expected the combination of low rates and an improving U.S.
economy, a good sign for corporate earnings, to set the stage for a
year of massive bond deals.
"You'll see a nice smorgasbord of offerings across all sectors
throughout the month of March," said Ron Quigley, managing director
and head of fixed-income syndicate at broker-dealer Mischler
Financial Group Inc. "The market remains very positive in here,
with rates still very low."
U.S. investment-grade corporate bonds have performed well amid
the sales uptick. They have offered a total return, including price
changes and interest payments, of 1.99% so far this year, versus
the 1.14% total return from the broader U.S. bond market, Barclays
data show.
Portfolio managers at Columbia Management said they would
consider buying the Actavis bonds. The sale is expected to be so
large that it will make up a sizable portion of the benchmark
indexes fund managers compare their performance against. "You have
to look at it given how big it's going to be in the benchmark,"
said Tom Murphy, a senior portfolio manager whose Columbia team
oversees $27 billion in investment-grade bonds.
Yields on the Actavis bonds have yet to be finalized, though
yields on new bonds are based in part off of recent trading. An
outstanding 2024 bond from the company recently traded to yield
about 3.5%, according to MarketAxess. In comparison, a 10-year U.S.
Treasury note recently traded to yield roughly 2%, lower than the
3% at the end of 2013.
The Actavis deal also is expected to do well because of overseas
buyers. Government bonds in Europe, which is battling a sluggish
economy, are yielding even less than U.S. government debt, luring
investors to U.S. markets. Bond yields in Europe could fall even
further as the European Central Bank begins buying bonds as part of
an economic-stimulus program.
Rates are so low in Europe that some U.S. companies have stepped
up debt sales overseas, locking in lower borrowing costs than what
they would have achieved in the U.S. Coca-Cola Co. sold EUR8.5
billion ($9.5 billion) last week, the largest euro-denominated
offering from a U.S. company.
"You have to feed the beast," said Gary Cloud, who helps oversee
the $515 million Hennessy Equity and Income Fund. "There's a lot of
beasts that need to be fed. There is an abundance of investible
capital in a world where available yields have plunged."
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