J&J's $13 billion bid for Shockwave turns to Wall Street for funding

MW J&J's $13 billion bid for Shockwave turns to Wall Street for funding

By Joy Wiltermuth

Wall Street deal making remains robust despite the Federal Reserve's rate hikes since 2022

Johnson & Johnson $(JNJ)$ rolled out a four-part bond on Monday to help fund its planned $13 billion acquisition of Shockwave Medical, underscoring how the Federal Reserve's rate hikes haven't dulled the appetite on Wall Street for deal-making.

The rare AAA-rated corporate debt deal was pegged as potentially climbing to around $10 billion in size, while also keeping Johnson & Johnson "firmly rooted in high-quality" investment-grade territory, despite "talc-related legal overhang" and J&J's management team calling it M&A appetite "voracious," according to Eric Axon's team at CreditSights team, in a Monday client note.

Aside from J&J and Microsoft Corp. $(MSFT)$ the bulk of U.S. investment-grade companies no longer view top-AAA credit ratings as a necessity, given that credit markets have remained largely open and attractive to borrowers, even during periods of stress.

To underscore the point, the spread on the ICE BofA US Corporate Index was last pegged at 89 basis points over the risk-free Treasury rate, or about 10 basis points away from the sector's low of the past 25 years, according to Leslie Falconio, head of taxable fixed-income strategy, at the chief investment office of UBS Global Wealth Management.

This year's front-loaded supply of corporate bonds has been met by robust investor demand, even as the Fed repeatedly dialed back market expectations for rate cuts, fueling wild swings in U.S. bonds.

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Yields on J&J's outstanding bonds have climbed since the beginning of the year, along with benchmark Treasury rates, elevating bonds maturing 16 years or longer above 5% yields, according to BondCliQ Media Services.

Despite the year's higher yields, U.S. companies have been no strangers to M&A, with February alone seeing almost $55 billion in related investment-grade bond supply, March issuing $9.4 billion and April completing $8.1 billion, according to a tally from BofA Global.

The recent wave is part of an estimated $429 billion investment-grade pipeline of M&A funding deals through April.

Falconio at UBS Global Wealth said investment-grade corporate bonds remain a "a most preferred allocation," in part due to their higher quality and a view that Treasury yields will decline in the second half of this year, in a client note Friday.

JNJ's planned acquisition of Shockwave $(SWAV)$ would boost its portfolio for medical devices, including treatments for heart disease.

JNJ didn't immediately respond to a request for comment. The company ended the first quarter with $26.2 billion in cash and related short-term investments, "providing significant flexibility in deal financing," according to CreditSights.

Stocks SPX DJIA were mostly lower Monday, but still near record territory, while the benchmark 10-year Treasury yield BX:TMUBMUSD10Y was slightly lower, near 4.47%, according to FactSet. Shares of JNJ were up 0.4%, while those of Shockwave were roughly unchanged.

-Joy Wiltermuth

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May 13, 2024 14:08 ET (18:08 GMT)

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