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Corporates stay strong despite market rout

LONDON, Nov 21 (IFR) - Corporate borrowers on both sides of the Atlantic shrugged off concerns about global volatility last week with pharmaceutical companies leading the charge, although they had to pay significantly higher premiums.

Bond markets have been badly shaken since the US election, with Donald Trump's victory accelerating a sell-off in rates sparked by fears that his expansionary fiscal policies will weaken US government finances.

But some investment-grade corporates in both the US and Europe have launched deals partly because things may get even worse, and partly because they are more sensitive to spreads than rates - with cash spreads proving more resilient than yields.

"It's a day-by-day market and funding opportunities remain, but with only limited chances for borrowers to comfortably issue before the break, the question is how many 2016 corporate funding exercises will now get pushed back into next year," said Mark Lynagh, head of European corporate DCM at BNP Paribas.

However, pharmaceutical companies spotted an opportunity, with the industry relieved that Hillary Clinton, who campaigned to bring down drug prices, lost the election. Companies such as Teva, Allergan and Mylan had seen their spreads tighten following the election.

Mylan (Baa3/BBB-/BBB-) was one of two US pharmaceuticals issuing reverse Yankees last week, selling a 3bn four-tranche trade. It followed a 3.6bn triple-tranche deal from Abbvie (Baa2/A-) last Monday.

Mylan hit the market after withdrawing a potential euro deal in September, when it came under intense scrutiny for sharply raising the price of its EpiPen allergy auto-injector. Abbvie's deal paved the way for its return.

"The market needed a pragmatic US borrower like Abbvie selling a well-sized bond to give  some confidence during the unstable backdrop," another banker said.

Both companies, though, had to offer generous concessions to lure investors with their debut euro offerings. The deals came about 25bp back of their US dollar curves, taking into account the cross-currency swap.

Bankers thought both companies' decision to issue 12-year notes as part of their transactions was misguided given the back-up in rates, with lower-rated Mylan, in particular, coming in for stick.

While Abbvie and Mylan turned to euros, other healthcare issuers went to the dollar market instead.

Pfizer sold a US$6bn bond on a difficult day when the sell-off in Treasuries finally began to impact on the primary market.

The deal last Monday was slow to price as 10-year Treasuries reached 2.30% and the 30-year yield nudged over 3% for the first time since the beginning of the year.

But the bond - Pfizer's largest since 2009 - got done on the back of a US$14bn book.

"People are seeing this sector rally and wondering how far it will go now that Trump is President-elect," one investor told IFR. "Now is the time to get in."

Pfizer's strong book and subsequent performance in secondary - the bonds tightened on the break - gave other healthcare names the confidence to come to market.

Abbott Laboratories, for example, finally decided to sell bonds to finance its US$25bn acquisition of St Jude on Thursday. The deal had been in the pipeline for months.

The medical device maker issued US$15.1bn through six tranches. Leads were able to tighten pricing across the curve after amassing a US$34.6bn order book.

This came despite investor concerns about higher leverage for a company that could soon drop sharply from its Single A ratings after targeting both St Jude and Alere for purchase. Pricing, however, reflected that falling ratings trajectory, with leads offering investors a new issue concession of 15bp. The bonds are expected to be rated Baa3/BBB-.

"That's a good sign of the health of the market that a low Triple B got US$15.1bn done. There were some reservations about how the market would react to the rates move but getting this deal through shows it's strong," a lead banker said. COUGHING UP Issuance wasn't just restricted to pharmaceutical companies. Eastman Chemical became the third US company to issue in euros last week, with a 500m 10-year and 200m tap of its 550m 1.5% May 2023s.

Like others during week, the borrower had to cough up, paying a hefty 30bp premium, but was still unable to tighten guidance from initial price thoughts. The order book size was undisclosed, which leads said was due to SEC regulations.

A lead bank was bidding the 10-year at 130bp over swaps by Friday, after pricing it at 125bp on Wednesday.

More deals are in the pipeline, though many in euros, at least, may get pushed into 2017. "This year could set a record for the number of deals that have to get booted into the following year," said one banker.

Corporate treasurers will be cognisant of commodity trader Louis Dreyfus, which pulled a five-year euro deal on Thursday, blaming a sharp increase in funding costs on volatile market conditions. (Reporting By Laura Benitez and Hillary Flynn, editing by Julian Baker, Matthew Davies and Sudip Roy)

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