Teva Pharmaceutical Industries is pushing into ESG territory for the first time, after the generic drugmaker announced a US$4bn-equivalent dual-currency senior unsecured sustainability-linked notes offering while it continues to tackle a debt mountain.
The Israel-headquartered issuer (Ba2/BB–/BB–) has mandated BNP Paribas, Bank of America, HSBC and JP Morgan for the deal which is expected to price next Tuesday following a roadshow.
The tenors of the euro notes will be 5.5 and 8.5 years. IPTs are in the low 4s and high 4s, respectively.
The dollar bonds will have 5.5 and 7.5-year tenors. IPTs are in the very high 4s for the shorter note, with the longer bond offering a spread of 37.5bp over that tranche.
The tactic of releasing IPTs during the marketing process mirrors a technique used in Teva's deal in 2019, when it raised US$2.1bn-equivalent through a dual-currency bond.
"Teva is one of these names with a huge range of coupons in the existing capital structure, and people can take different views on where it will price," said a banker. "This gives the investor community an idea of the thinking and a peg in the sand which they can react to."
CreditSights analysts said the IPTs on the dollar bonds looked about 80bp back of Teva's curve, while an investor said the whole offering looked cheap to start with, reflecting uncertainty around the company's ongoing opioid lawsuits in the US.
The legal problems have been a longstanding headache for Teva.
Chief executive officer Kare Schultz said the company remained in talks with state attorneys general and was hopeful for a settlement within 12 months. He said the upcoming New York trial could serve as a trigger for a settlement.
The company's litigation profile is a constraint on its ratings. It is on a negative outlook with Moody's and Fitch, while S&P's outlook is stable.
"The legal liability is there, it's large but not exactly quantifiable, but I do believe it will be resolved in a way not to bankrupt the company, which is the largest pharmaceutical generics producer in the world," said Olga Budovnits, portfolio manager at Main Partner.
"The company generates money and is committed to debt reduction. It has no other choice, basically, it's the only way to increase market capitalisation long-term."
Teva has an extensive curve in dollars and euros, partly as the hangover of its ill-timed 2016 purchase of Allergan's generic drugs business.
"Teva has a massive capital structure which is actively traded, and in a healthy place," said the banker. "The market conditions are maybe off the boil from four to six weeks ago, but by historical standards it's a pretty robust backdrop. Teva will get a lot of questions thrown at them in the roadshow, although most investors in the capital structure know the answers already."
It is fresh off reporting that it paid down US$1bn in the third quarter, bringing its net debt to US$21.7bn. While the company has targeted a net-debt-to-Ebitda level of 3 times by 2023, Schultz told Reuters the company would likely be aggressive until around 2025, when debt should fall to a more manageable US$10bn–$12bn.
CreditSights said the company's target to bring net leverage below 3 times by the end of 2023 was aggressive, and thinking it more likely the figure would be mid to high 3 times.
"We view this as solid progress for a company that carried 5.7 times net leverage as recently as mid-2019," said CreditSights.
The new bonds are coming alongside an offer from Teva to buy back up to US$3.5bn across six of its bonds. The targeted notes are the 1.25% 2023s, 2.8% 2023s, 3.25% 2022s, 2.95% 2022s, 1.125% 2024s and 6% 2024s.
Evolving investor base
Teva's investor base has changed considerably since it was a high-grade issuer when it was buying Allergan's generic drugs business. Then, its bonds were overwhelmingly sold to US high-grade buyers, with a smattering going to EM accounts, though many of those investors bypassed its deals entirely, as they were deemed much too tight.
Since falling to sub investment grade, Teva has become a staple for high-yield investors. EM investors have become more interested too, given the yields on offer for a Double B credit.
The SLBs have two KPIs. The first is to increase access to Teva's portfolio of medicines on the WHO's model list of essential medicines. The second is to decrease absolute GHG emissions in tCO2e.
“EM ESG linked debt accounted for around 3%–5% of total issuance in the last few years, compared to almost 18% this year, so someone like Teva shows there is definitely growing appetite from issuers,” said Sergey Dergachev, senior portfolio manager, functional head emerging markets corporates at Union Investment.
“This sort of sustainability-linked deal has been more prominent in LatAm, as the first step for those companies which are perhaps more hesitant to go for a fully fledged ESG issuance. I will be very curious to see the feedback from the Teva roadshow, which feels like the first in a very long time to have both virtual and physical meetings.”
The shorter euro and dollar bonds each have a 15bp premium payment at maturity per sustainability performance target missed, up to a total of 45bp. The two longer bonds both have a 12.5bp coupon step-up per SPT missed and per annum from November 2026 until maturity, at a maximum of 37.5bp per annum.