Shaking off Sandy: Just days after Hurricane Sandy devastated the US northeast, AbbVie, the pharmaceutical spin-off from Abbott Laboratories, priced the biggest ever investment-grade bond deal in the US market at US$14.7bn. Despite syndicate and buyside desks being half-staffed, the six-part deal attracted US$41bn of demand in a morning’s work, making it IFR’s US Dollar Bond of the Year.
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It takes some nerve to bring a US$14.7bn deal to market in the midst of chaos in the wake of a hurricane, not to mention a day before a crucial presidential election.
Yet doing such a large deal amid a financial capital market devastated by a hurricane and in the face of potential post-election volatility paled in comparison to the biggest challenge of all for AbbVie.
That was striking the perfect balance between offering enough in price to ensure an oversubscription investors associate with success, without by leaving too much on the table.
While that’s the objective of every issuer, pricing truly had to come close to perfection for a deal close to US$15bn. A few basis points too tight and a disastrous unravelling of the book could occur; while a tad too much left on the table could blow out AbbVie’s funding costs.
“This was not just ’a big deal’,” said Paul Spivack, head of syndicate at Morgan Stanley, Abbott’s adviser on the spin-off, sole lead on the 10-year and the only firm to have a bookrunner position on all six tranches of the deal.
“There’s a material difference in the way you do a US$5bn or even a US$10bn deal and one of this size. With a US$14.7bn transaction you don’t have the luxury of presuming that if you get the three to five of the largest investors on board that the deal should work.”
AbbVie understood the reality of the situation, which was to get to multiple oversubscription levels meant accepting investors’ varying valuation methodologies, including buyers beyond those who would put in orders at what it considered fair value.
At the core of the deal’s pricing was the 10-year tranche, with spread added or subtracted for the other tranches ranging from three to 30 years.
The differing views among so many investors was enormous, ranging from 125bp–170bp on the 10-year, because of the different comparables and pricing methodologies they each used and the kind of cushion they each required for the size.
But after seeing more than 75 accounts on a non-deal roadshow, AbbVie gained enough reverse enquiry to set whispered levels at what would secure its minimum size.
“Reverse enquiry from the non-deal roadshow gave us an understanding of the methodologies investors were using, the depth of demand and the shape of the curve,” said Spivack.
Morgan Stanley settled on a 150bp whispered level on the 10-year and from there it and the other the leads – Barclays, Bank of America Merrill Lynch, JP Morgan, BNP Paribas, Royal Bank of Scotland, Deutsche Bank and Societe Generale – nailed down initial price thoughts of 185bp for the 30 year, 120bp for the five year and 95bp for the three year.
At 150bp the whispered level on the 10-year enticed investors with a very generous 35bp–40bp pick-up over Amgen.
But by casting the net wide from the outset, AbbVie attracted a whopping US$41bn book and a momentum that enabled leads to ratchet in pricing by as much as 25bp tighter than initial thoughts.
Ultimately it priced US$500m of three-year floaters at three-month Libor plus 76bp; US$3.5bn of 1.20% 2015s at Treasuries plus 85bp; a US$4bn 1.75% five year at 110bp; a US$1bn 2.00% six year maturing in 2018 at 140bp – a tranche added during the bookbuilding phase to avoid a maturity spike in the fifth year – US$3.1bn 2.90% 10-year notes at 130bp and a US$2.6bn 4.40% 30 year at 160bp.
The tranches all traded tighter by 15bp–20bp across the curve, in line with the average performance of other US$5bn-plus deals, and provided AbbVie with an impressive weighted average cost of just over 2%.
