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$39B Deal: AZN CDS Update

14 December 2020 by jbchevrel

Today was marked by the outperformance of everything UK, especially banks CDS, as Michel Barnier told a private meeting of ambassadors that a trade deal with the UK could be completed as soon as this week. The UK has apparently made concessions on the level playing field and is now pushing the bloc to soften its demands on fisheries. A compromise on fisheries could unlock the accord, Barnier said. As most market participants are of the view that fisheries alone cannot block a deal, we have seen UK assets stronger. However one UK CDS bucked that daily move tighter. Indeed, the biopharmaceutical company AstraZeneca PLC saw their CDS widen by +8bp on the day from a tight 25bp on Friday’s close. AZN focuses on 3 main therapy areas: Oncology, Cardiovascular, Renal & Metabolic and Respiratory, while selectively pursuing therapies in Autoimmunity, Infection and Neuroscience. This year they partnered with Oxford University to develop a vaccine against COVID. Thus, after a widening to 57bp in March, AZN 5y CDS quickly retraced tighter to close a tad below 15bp on May 1. It then ranged between 15 and 25bp until today’s clear break wider due to M&A news. AZN launched a $39B stock-and-cash acquisition of an US biotech company called Alexion, in what would be one of the largest US takeovers this year. Worrisome for AZN investors is that AZN is paying a 45% premium. This premium is high in absolute, but not so much, by biotech standards. Strategically, it will add exposure to rare diseases for AZN. Credit-wise, AZN’s plan is to pay down the new incurred debt within 3 years, relying on Alexion’s cash flow. One of their blood disease drug [called Soliris] is approaching the end of its patent period. Some negative news had hit on AZN earlier this quarter, about disappointing development on their COVID vaccine trial results, but that hadn’t had a huge impact on this very tight CDS.