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Pharmacy chain CVS Health CVS -0.32%

Corp. sold $40 billion of bonds
Tuesday to help pay for its acquisition of health insurer Aetna Inc.

AET -0.39%

months before it needs the money, seeking to get ahead of an
expected rise in interest rates and a flood of borrowing across the economy.

The sale, the largest in two years, showed there is still eager demand from
investors for corporate bonds issued by financially strong borrowers. But
investors and companies say they are bracing for a sea change in the
markets caused by shifts in U.S. monetary and fiscal policy that could
penalize prospective debt issuers for waiting.

Investors are anticipating a deluge of bond issuance this year. The U.S.
Treasury announced it would be selling $42 billion of additional bonds in
the period from February through April, and many analysts forecast that
the government will announce additional increases to bond sales in May.

Greater availability of bonds could send their prices lower, which results in
higher rates. Some analysts and investors expect the additional supply of
debt will push borrowing costs throughout the economy higher.

Regulators aren’t expected to pass judgment on the $69 billion Aetna
purchase until late this year, but CVS issued the debt this week to avoid the
risk that interest rates continue to rise, people familiar with the deal said.
Another jump in Treasury bond yields would make it more expensive for
corporations to borrow and could suppress investor appetite for new
corporate debt.

Yields on corporate bonds jumped in tandem with U.S. interest rates this
year, triggering a fall in bond prices and a decline in overall debt sales.
Issuance of investment-grade corporate bonds totaled $217 billion in
January and February compared with $256 billion in the same period last
year, according to data from S&P Global.

Investors and other prospective borrowers were carefully watching CVS’s
deal to see if the move in rates had affected the market’s capacity to finance
outsize takeovers.

“There was a lot riding on this deal,” said Drew Conrad, a bond trader for
Denver Investments, which manages about $4.5 billion of fixed income. “I
think if this deal had gone poorly it would have made it harder for some of
these large M&A deals to price debt where they wanted.”

CVS paid a slightly higher yield on the debt than is common for new bond
sales, attracting hefty demand from investors who placed orders worth
about $120 billion, or three times the amount of bonds on offer, people
familiar with the deal said. The company will also use $4 billion of cash, a $5
billion loan and stock to pay for the buyout, the people said.

“Having a successful offering for CVS was important for paving the way for
some other large borrowers,” said Dan Mead, a senior banker at Bank of
America Corp. who worked on the deal. “The transaction showed there is
still depth for large M&A financings in the investment-grade bond market.”

After a relatively slow 2017, M&A activity is heating up, with pending deals
including United Technologies Corp.’s $23 billion planned purchase of
Rockwell Collins and Bayer AG’s $57 billion expected acquisition of
Monsanto Co.

Falling interest rates around the world in recent years pushed yield-starved
investors to increase purchases of global corporate investment-grade
bonds, fueling a record $3.32 trillion of issuance in 2017 as companies
rushed to take advantage of low rates, according to data from Dealogic.
Foreign purchases of corporate bonds slowed this year as the yield on the
benchmark 10-year Treasury note rose by roughly half a percentage point. A
Bloomberg Barclays index of the debt has declined 2.81% since Jan. 1.

Investors expect yields to remain higher, as the Federal Reserve raises
interest rates and U.S. tax cuts combined with the recent budget agreement
create more fiscal stimulus for an already-growing economy.

CVS offered buyers of the new debt a higher yield than that on its current
bonds to ensure strong participation. CVS priced a new $5 billion bond due
in 2025 to yield about 1.45 percentage points more than comparable U.S.
Treasury bonds, roughly 0.15 percentage point more than its existing bonds
of similar maturity, according to data from MarketAxess.

The company split the $40 billion financing into seven bonds with
repayment dates ranging from two years to 30 years. The 30-year portion,
which yields 1.95 percentage points more than underlying Treasurys, will

remain outstanding even if
regulators reject the Aetna
purchase, which would force
CVS to buy back most of the
debt, investors said.

The company hired five investment banks to jointly arrange the sale: Bank
of America Corp., Barclays PLC, Goldman Sachs Group Inc., JPMorgan
Chase & Co. and Wells Fargo & Co.—a larger group than normal to manage
its size.

Larger investors willing to hold the debt for an extended time received most
of the bonds they ordered, but smaller investors received as little as one-
quarter of the bonds they asked for, a fund manager and one of the people
familiar with the deal said.

CVS’s borrowing for the acquisition would increase its debt load to around
4.7 times earnings before interest, taxes, depreciation and amortization, or
Ebitda, from 3.3 times in June, according to Moody’s Investors Service Inc.

The company intends to reduce that ratio to around 3.6 within two years by
increasing earnings and using excess cash to repay debt, Moody’s said.

CVS expects to close the deal in the second half of 2018. Federal authorities
reviewing the proposed merger last month asked for more information,
pushing back the deadline to rule on the deal. CVS said it anticipated the
move and that the process is “progressing as planned.” Shareholders for
both companies are set to vote on the deal March 20.

CVS shares fell sharply, while Aetna’s stock jumped, when The Wall Street
Journal first reported the companies were in talks in October. CVS shares
are down about 15% from a year ago; Aetna’s stock price is up nearly 50% in
that time.

answer the following questions:

1. Why did CVS Health CVS sell $40 billion of bonds? Why is the company going into debt?

2. It is not clear if regulators will even allow the acquisition of health insurer Aetna. So why is CVS selling bonds now? What is the great hurry?

3. “Investors are anticipating a deluge of bond issuance this year,” according to the article. Why? What changes in the macro environment can account for this?

4. Why does the anticipated deluge of bond issuance matter to firms in general? How can it affect the strategic management of companies?