Valeant's jumbo bond to quench thirst for large liquid issues

By Mariana Santibanez

NEW YORK, Feb 24 (IFR) - High-yield investors clamoring for chunky-sized trades with ratings closer to investment grade will get another stab at picking up paper when pharma giant Valeant launches a US$9.6bn bond to finance its acquisition of Salix Pharmaceuticals.

The expected bond from the issuer, rated just three notches below investment grade at Ba3 by Moody's and BB- by S&P, would be the second largest high-yield bond on record, and the biggest ever from a pharmaceutical company, according to IFR data.

Part of a broader US$15bn debt package, the bond will refinance an unsecured bridge loan and comes as large, liquid deals are popular with investors cautious about liquidity and flush with cash after billions of inflows into the asset class.

"A year ago, the market was not asking enough for liquidity," said one high-yield investor. "But that's changed. If we're being asked to buy a US$250m deal versus a US$500m we want to be compensated for it."

Market conditions for a deal of this size are opportune.

Despite an uncertain start to the year, high-yield primary market volumes as of February 23 were up 30.91% at US$45.36bn versus US$34.654bn a year earlier, according to IFR data.

And the US$10.012bn that has poured into high-yield funds between January 28 to February 18, according to Lipper, has bolstered demand for some sizeable acquisition financings this year for the likes of Altice, GTECH, Dollar Tree and Petsmart.

PetSmart saw north of US$9bn of orders for its US$1.9bn senior unsecured deal - the biggest leveraged buyout of the year - while GTECH got around US$17bn and Altice a whopping US$60bn for its US$5.3bn-equivalent bond deal which financed its acquisition of Grupo Oi's Portuguese operations.

What also works in favor of Valeant is that it comes from a sector perceived to be defensive and investors are familiar with the name.

Buyside accounts were left disappointed last year after Valeant lost out to investment-grade rated Actavis in the battle for Botox maker Allergan. Valeant had been expected to finance the deal with US$20bn of debt.

The Salix deal, therefore, will make up for some of that disappointment even if some investors were less keen that the deal had no equity financing.

"Valeant is fairly well known, as is the acquisition target, and that creates a bit of comfort," said Steven Oh, global head of credit and fixed income at PineBridge Investments.

Moody's affirmed its Ba3 rating, saying the deal would improve Valeant's scale and diversity with a leading gastroenterology business.

"Salix is a leader in the gastrointestinal market, which is comprised primarily of small-to-mid-sized pharmaceutical competitors," said Julie Stralow, a credit analyst at Morningstar.

"Typically Valeant thrives in niches that tend to be overlooked by larger pharmaceutical firms."

NOT THAT EASY

But as with any deal of this size, selling the bonds will not be easy.

For starters, Valeant will need to make its way through an expected flood of pharma deals that could absorb a lot of cash from the market.

Actavis, for example, is prepping a US$22bn bond deal to finance the Allergan trade, and a roadshow is expected to get underway this week, market sources said.

The high-grade market is expecting at least US$50bn of debt to be raised by the pharma sector via loans and bonds this year, and in a variety of currencies including euros and dollars.

Still the surfeit of cash means appetite for Valeant debt would be sufficient if it came after the Actavis trade and closer to the end of the second quarter.

"Pharma has been a very active sector for M&A. With the Salix acquisition not expected until the second quarter, this should help put some space between these two big bond deals," said Stralow.

Still, the company is doubling its debt load to around US$31bn, and investors will be focused on how quickly it can bring that down.

Valeant in its fourth quarter results reported a net debt of US$15.3bn, with net leverage ratio at approximately 3.5 times adjusted pro-forma EBITDA.

Valeant said initial net leverage post the acquisition will be around 5.6x and that it is committed to reducing net leverage to below 4.0 times by the second half of 2016. The company's ratings are not expected to change.

(Reporting by Mariana Santibanez; Editing by Natalie Harrison and Shankar Ramakrishnan)