The Corporate bond market just goes on and on and on. With almost $50 billion in supply, last week saw the biggest calendar since early September. And this was in spite of the fact that we’ve had a couple of months of spread widening. Investors still have plenty of appetite for investment grade bonds, and not just high quality — plenty of crossover bonds found a home. General Motors (Ba1/BBB-) was in the market with $2.5 billion of 5s, 10.5s, and 30s; Owens Corning, Discover Financial Services, and Omnicare also brought crossover deals totaling nearly $2 billion.
The deal of the week, though, was definitely Walgreens. The US drug retailer was in the market with $8 billion of bonds to finance its pending acquisition of British pharmacy Boots PLC. The US$ deal was followed by another $2 billion in Euros and Sterling today. Walgreens, now rated mid-BBB, had been a solid A-rated company until investing in Boots. In 2007, Boots PLC was the largest-ever LBO in Europe at 11.1 billion pounds, and was among the transactions the market was concerned about in the financial crisis. With LBO debt maturities looming, Walgreens took its initial 45% stake in Boots in 2012 for $6.7 billion. That first kiss must have been like a drug, because on August 6, 2014, Walgreens announced that it would purchase the remaining 55% ahead of schedule. This announcement came in spite of the fact that sales will be lower than expected, and it will not reap the benefit of a potential tax inversion. By purchasing the remainder, and agreeing to take on $7 billion in existing debt, Walgreens will have paid $22 billion for Boots, or 2x what the market thought was a pretty full price in 2007.
Walgreens shareholders have been none too happy about the transaction – the stock dropped nearly 20% on the August 6, 2014 announcement. The bond deal, though, went remarkably well, as the company brought 7 different tranches across the curve. The transaction came at relatively generous spreads (+145 on a 10 year is considered generous these days), and bonds have tightened about 7-10 basis points across the curve since pricing.
That is a pretty happy ending for KKR, to be sure. Whether it turns out to be magic for the company’s new bondholders remains to be seen.