Abbott Labs announces 3-part debt offering

Posted May 24, 2010 at 12:21 p.m.

Dow Jones Newswires | Abbott Laboratories, which recently has
taken steps to buy big parts of Solvay Pharmaceuticals of Belgium and
Piramal Healthcare of India, said Monday that it plans to sell a
three-part benchmark-size offering of senior unsecured notes.

The offering, which according to people familiar with the deal could
range from $3 billion to $4 billion, comes none too soon, as investors
seeking high-grade bonds have found very little new issues of late.
Anemic weekly volume has totaled just $17.79 billion in new supply for
May, according to data provider Dealogic, which ranks this month as one
of the lowest on record. Just under $5 billion in new paper was sold
last week.

Lingering euro-zone concerns coupled with uncertainty over U.S. financial regulation overhaul legislation have kept borrowers at bay, and buyers have become increasingly credit-specific when choosing investments.

But investors have had a long-term love affair with debt issued by pharmaceutical companies. Money managers have been eager to put cash to work in a market sector that offers ample yield coupled with relatively little risk.

Abbott said it would sell its notes via active bookrunners Bank of America Merrill Lynch, J.P. Morgan and Morgan Stanley. They have received more than $6 billion in orders, illustrating robust appetite. The issue will include five-, 10- and 30-year tranches.

Preliminary price guidance suggests a risk premium of 70 basis points and 75 basis points — 0.70 and 0.75 percentage points — over Treasurys of comparable maturities for the five-year piece; 90 basis points to 95 basis points on the 10-year part and around 125 basis points over Treasurys on the 30-year portion.

Abbott 5.875 percent notes due 2016 recently traded at 102 basis points, its 5.125 percent bonds due 2019 traded at 68 basis points and its 6.00% bonds due 2039 changed hands at 114 basis points, according to MarketAxess.

An e-mail to the company seeking comment wasn’t returned.

The pharmaceutical firm is buying the domestic drug-making business of Piramal for nearly $3.72 billion. That follows its February acquisition of a part of Solvay that carried a hefty price tag of $6.2 billion.

Proceeds from this transaction will be used to refinance short-term borrowings, including commercial paper.

Byron Douglass at Credit Derivatives Research said the bond sale “is not surprising given the company’s relatively low cash balance ($1.8 billion) and Friday’s announcement to acquire Piramal Healthcare for $3.7 billion.”

“Given Abbott’s strong balance sheet, interest coverage, and leverage,” Douglass added, “we find today’s issues going out roughly at fair value.”

Moody’s Investors Service, which rated the upcoming debt offering A1, said that while the new issue will help Abbott restore some liquidity after the Piramal acquisition, Abbott will still “carry a substantial amount of short-term debt, including commercial paper as well as maturities of both bank loans and bonds.”

Standard & Poor’s gave the offering a preliminary double-A rating, citing the drug maker’s “solid positions in a number of diverse health care segments, its excellent financial profile and robust discretionary cash flow.”

Despite this offering, volume in the new issue market is expected to remain thin with most  supply consisting of mainly industrial and non-financial names.

“Investors are experiencing sticker shock with very low high-grade bond yields,” according to analysts at J.P. Morgan. They said in a note that yields have fallen 47 basis points from the beginning of this year, and are currently at 4.81 percent. Yields have declined 23 basis points since May 12.

“We believe that yields are going to stay low and this is going to be a problem for many going forward,” they wrote.

Scott MacDonald, head of research at Aladdin Capital Markets, said the investment landscape remains interested in avoiding risk as it is dominated by flight-to-quality trades and the adoption of a wait-and-see attitude among many investors, with the main dilemma where investors should put money.

“This situation does not foresee a massive spread widening, but does mean that over the next few weeks spreads for corporate and sovereign bonds and CDS are likely to widen,” he said.


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