The Long and Short
Inaugural issuance for CSL Finance well received
Meredith Contente | April 22, 2022
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
CSLAU tapped the market this week to partially fund its pending acquisition of Vifor Pharma, which is expected to close by the end of the second quarter this year. Given the strong ratings for the first-time issuer (A3/A-), the $4 billion, 6-tranche deal was well received and more than two times oversubscribed, which helped the deal to price roughly 25 to 35 bp tighter than initial price talk depending on the tranche. Despite being higher rated than its peer Amgen Inc. (AMGN – Baa1/A-/BBB+), bonds priced roughly 15 to 20 bp behind AMGN, which should enable further spread tightening post launch, especially since the credit provides portfolio diversification as this is the company’s inaugural issuance. Spreads could settle 5 to 10 bp behind AMGN post acquisition close, with that differential potentially collapsing. A successful integration of Vifor should materially increase CSLAU’s scale and free cash flow generation, enhancing deleveraging efforts.
Exhibit 1. CSLAU Debt Issuance
Details of the Deal
CSLAU issued $4 billion of debt across six tranches, including a 40-year tranche (Exhibit 1). Investor demand for duration likely led to its inclusion; it was the first 40-year corporate bond issued by an Australian or New Zealand based company. All bonds will be guaranteed by parent company CSL Ltd., as CSLAU is the financing arm of the parent. CSL Ltd. is a leader in plasma-based therapies as well as the world’s second largest manufacturer of flu vaccines.
Proceeds from the deal, along with cash on hand and equity issuance, are being used to fund the company’s $11.7 billion acquisition of Vifor Pharma AG, a global pharmaceutical company that specializes in iron deficiency, dialysis, nephrology and rare diseases. The acquisition, announced in December 2021, is expected to close by June 30, 2022. This will be CSLAU’s largest acquisition to date, given the company’s track record of focusing on tuck-in acquisitions. Integrating the two companies is likely to be the largest risk associated with the acquisition. CSLAU management plans for Vifor to remain a separate business entity and will need to successfully demonstrate its ability to renegotiate existing licensing agreements and maintain current business relationships.
All About Plasma
Given its leading position in plasma-based therapies, CSLAU relies heavily on plasma donations. CSLAU operates the world’s largest plasma collection networks through its operating unit CSL Plasma. The company was negatively impacted by the pandemic as plasma collections dropped significantly due to lockdown restrictions and social distancing measures. Margins contracted due to increased collection costs, as well as higher fixed cost absorption on lower collection volumes. Plasma products tend to have a long manufacturing cycle as it typically takes 9-12 months after plasma is collected until the plasma product is sold. Margins will be impacted for slightly longer at CSLAU versus non plasma-based therapies, due to the impact on collections due to COVID. However, with the rollout of COVID vaccines and increased donor incentives, plasma donations have improved in 2021 and are expected to continue to grow in 2022. In the first half of 2022, plasma volumes are already up 18% and weekly donors are approaching pre-pandemic levels (Exhibit 2).
Exhibit 2. CSLAU Weekly Plasma Donors (2019-2021)
Moody’s and S&P Differ on Outlooks
While both Moody’s and S&P affirmed CSLAU’s ratings on the acquisition announcement, they took a different approach with respect to their outlooks. Moody’s also affirmed its stable outlook noting that while they view the acquisition as “broadly neutral” to the company’s business profile, the leverage increase, expected to move to 2.7x from below 2.0x, remains in line with the current rating. Moody’s believes that the acquisition will improve CSLAU’s scale and does not view integration risks to be meaningful. Challenges that Moody’s has outlined with respect to the acquisition – patents and successful pipeline launches – are deemed to be more equity than credit related. Moody’s sees limited negative impact from the acquisition which underscores its stable outlook.
S&P’s approach to the outlook differs in that they believe the integration risks are much higher given the company’s acquisition track record. Additionally, S&P’s leverage threshold for the current rating is lower than Moody’s, at 2.0x, therefore the agency will need to see management prioritize debt reduction over the 18-24 month period post close. While CSLAU management had explicitly stated that they are committed to the low single-A ratings, S&P believes integration risks could reduce earnings potential which could prolong management’s ability to bring leverage below the 2.0x level. However, should the company be successful in deleveraging, we believe S&P will revise its outlook to stable.