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By Mariana Santibanez, Robert Smith and Claire Ruckin
NEW YORK, March 13 (IFR) - Pharmaceuticals firm Endo stunned the market with a last-minute bid for Salix last Wednesday, but the surprise turn of events did little to dent demand for a multi-billion dollar junk bond issue backing rival Valeant's bid.
Orders for the Canadian pharmaceutical giant's bigger than expected US$10.1bn-equivalent deal - the second-largest junk bond offering in history - reached an impressive US$29bn, as investors piled into the deal despite the sudden uncertainty.
Valeant has built a global pharma empire by funnelling cash into acquisitions rather than research and development, with its Canadian headquarters giving it more flexibility to domicile its intellectual properties in tax havens such as Barbados.
Endo is very much trying to replicate this model, even going as far as hiring Valeant's former president to lead the company, albeit from an Irish domicile.
Valeant's US$10.1bn purchase of Salix looked a fait accompli, with the Canadian firm launching the jumbo bond alongside a US$4.15bn Term Loan B, until its Irish rival trumped it with a US$11bn bid slap-bang in the middle of the bookbuild.
Bankers on the deal were initially stunned, but were quick to assert that the debt financing would proceed as planned.
One banker on the deal pointed out that the proceeds of the issue would be held in escrow and the bonds were redeemable at par if the acquisition fell away, meaning Valeant would only have to pay interest costs if the deal went awry.
"The bond deal is going ahead," he said on Thursday. "We'll see what happens with the M&A, but Valeant thinks their offer is better financed and better quality."
Market analysts agreed.
"We doubt that Valeant will lose Salix to Endo," BMO Capital Markets said in a note to clients, while analysts at Jefferies pointed out that while Endo's offer was higher, it comprised 25% cash and 75% equity in contrast to Valeant's all-cash offer.
Salix also faces a hefty US$356.4m termination fee if it backs away from the agreement with Valeant, on top of up to US$50m to cover Valeant's "out-of-pocket expenses".
The clamour for large and liquid high-yield bond complexes has intensified as secondary market liquidity has dwindled, leading investors to shrug off the threat of Endo's bid.
"As long as we are protected, it doesn't really matter," said one bond investor buying the deal.
He was not alone. In the face of the US$29bn of demand, leads priced US$2bn of 5.375% senior unsecured five-year notes, US$3.25bn of 5.875% eight-year bonds, 1.5bn of 4.50% eight-year bonds and a 6.125% US$3.25bn 10-year bond tranche. All tranches were priced at par and are rated B1/B. Final pricing on the eight-year and 10-year dollar tranches was 12.5bp tighter than price talk.
The euro-tranche is Valeant's first in the currency, with the Canadian firm lured into the market due to the low headline yields, despite having limited euro cashflows, according to a banker on the deal.
This gives the bonds an enormous amount of rarity value for European accounts, allowing leads to screw in pricing from the generous 5% whisper.
"A lot of European investors will not have had an opportunity to get exposure before," said one London-based investor.
Pricing was also tightened on the US$4.15bn Term Loan B, which was reduced in size by US$400m. Valeant opted to increase the size of the bonds relative to the loan as the bonds are free from restrictive maintenance covenants.
Pricing on the loan was cut to Libor plus 325bp with a 0.75% Libor floor and a discount of 99.5, down from Libor plus 350bp with a discount of 99. Commitments were moved up to 5pm on Thursday from an original Friday deadline.
After Endo made the competing bid, Valeant set the ticking fee (a fee paid by the borrower during the commitment period) on the loan to include the full spread and the floor at 30 days after allocation.
The loan pricing structure includes a step-down to Libor plus 300bp when net secured leverage reaches 1.75 times.
Deutsche Bank led the Valeant bonds, with HSBC, MUFJ, DNB, SunTrust Robinson Humphrey, Barclays, Morgan Stanley, RBC and Citigroup also bookrunners on the deal.
Endo is working with financial advisers Bank of America Merrill Lynch and Credit Suisse to arrange financing to back its offer. Moody's said on Thursday it might downgrade Endo's Ba3 rating on expectations that leverage would rise. (Reporting By Mariana Santibanez, Robert Smith and Claire Ruckin; Editing by Natalie Harrison and Matthew Davies)