Roche’s $16 Billion Bond Sale Shows Demand for Debt

Roche Holding AG sold $16 billion of bonds to finance its takeover of Genentech Inc. in a sign of thawing credit markets, according to data compiled by Bloomberg.

The second-largest company bond offering, along with a $10 billion sale of government-guaranteed debt by JPMorgan Chase & Co., propelled U.S. corporate debt issuance to a daily record yesterday of $32.55 billion.

Companies are selling debt at an unprecedented pace this year as they take advantage of a rally in credit to raise cash amid a deepening recession. This year’s record bond issuance shows that government steps to stabilize the financial system are boosting highly rated debt markets, said Ashish Shah, head of credit strategy at Barclays Capital in New York.

“You’ll see continued strength in investment-grade bonds,” Shah said yesterday in a telephone interview. “The demand is there. Liquidity continues to improve across the credit markets.”

Borrowers have sold $226 billion of bonds in 2009, 45 percent ahead of the 2007 clip, even as the Standard & Poor’s 500 Index decreased 12.7 percent this year amid the worst financial crisis since the Great Depression. That’s the stock index’s worst start to a year, according to data compiled by Bloomberg going back to 1928.

In Europe, investment-grade companies sold 209 billion euros ($263 billion) of bonds in the region’s common currency and in British pounds since Jan. 1, up from 71 billion euros in the same period last year, Bloomberg data show.

‘Lot of Cash’

“Investors have a lot of cash to put to work and investment banks aren’t carrying a lot of inventory,” said Stuart Hosansky, a principal in Malvern, Pennsylvania, at Vanguard Group, which has $488 billion in fixed-income assets under management. “If a single A rated company or above comes to market, there is significant demand.”

Roche, Switzerland’s biggest drugmaker by sales, will finance its $42.1 billion bid for full ownership of Genentech of South San Francisco, California, with a mix of cash, bonds, commercial paper and bank loans, Chief Financial Officer Erich Hunziker said during a conference call with investors on Feb. 17.

Roche’s dollar-denominated sale included $3 billion of one- year notes that will float at 100 basis points more than the three-month London interbank offered rate; $750 million of two- year notes floating at 200 basis points over Libor; and $2.5 billion of three-year, 4.5 percent notes that priced to yield 335 basis points more than Treasuries of comparable maturity, Bloomberg data show.

Deal Pricing

The company sold $2.75 billion of five-year, 5 percent notes that also pay a spread of 335 basis points; $4.5 billion of 10- year, 6 percent notes with a 345 basis-point spread; and $2.5 billion of 30-year, 7 percent bonds at 365 basis points, Bloomberg data show. A basis point is 0.01 percentage point.

The Roche debt is rated Aa1 by Moody’s Investors Service, the second-highest level of investment grade, and two steps lower at AA- by S&P. The average “AA rated” bond yields 375 basis points more than Treasuries, according to Merrill Lynch & Co. data.

Basel, Switzerland-based Roche will also seek to sell bonds in European debt markets and raise as much as $10 billion in commercial paper following the sale in the U.S., Hunziker said on the call. The company has no plans to return to the U.S. bond market in 2009, he said.

“Investors are willing to say yes because it’s Roche,” said Sachin Shah, an analyst at Icap Plc who tracks companies involved in mergers and is based in Jersey City, New Jersey. “They are giving terms upfront and trying to get the paper straight into the hands of investors. Although they’re using the banks as intermediaries, they’re saying we don’t need them to house this on their balance sheet indefinitely.”

Stock Advances

Genentech advanced $1.70 to $84.70 in New York Stock Exchange composite trading yesterday. Roche today rose 0.4 Swiss francs, or 0.3 percent, to 147.6 francs by 9:20 a.m. in Zurich.

Jennifer Lowney, a Roche spokeswoman, and Caroline Pecquet, a Genentech spokeswoman, declined to comment.

With the Roche sale and the JPMorgan offering, yesterday was the busiest on record for U.S. dollar investment-grade borrowers, Bloomberg data show. The previous record was set Jan. 29, when companies issued $17.5 billion of investment-grade debt.

Freddie Mac, the mortgage-finance company under government control, raised $10 billion selling three-year reference notes in its largest debt offering. Investors offered to buy 30 percent more debt than was sold, said Peter Federico, treasurer of the McLean, Virginia-based company.

Bank Group

Roche hired Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. to help sell the debt. Roche Holdings Inc. is issuing the debt, Hunziker said.