NEW YORK, Sept 29 (IFR) - Investors piled billions of orders into a US$1.3bn bond from media giant Viacom on Thursday, betting that a possible merger with CBS would help turn around the struggling business.
The deal was one of the most heavily oversubscribed investment-grade bonds of late, notching up an US$11bn order book even as pricing was tightened sharply during bookbuild.
It was M&A speculation that largely drove demand for the trade - and attractive features that bolstered investor confidence.
Sumner Redstone's National Amusements, the majority shareholder of CBS and Viacom, on Thursday proposed a merger of the two companies, suggesting a reversal of a split made 10 years ago.
"If Viacom and CBS do merge, spreads could tighten in another 20bp," one investor who bid for the bonds told IFR.
Viacom is teetering on the brink of junk with ratings of Baa3/BBB-/BBB. Moody's Investors Service downgraded Viacom just this month, citing a weaker-than-expected rebound in operating performance and high debt.
Its credit spreads were in any case under pressure in recent weeks following dismal results, rising leverage and a management shake-up that included the firing of its CEO Philippe Dauman and resignation of interim CEO Thomas Dooley.
But analysts believe a re-merger would be a credit plus for Viacom - whose cable television networks include Comedy Central, MTV and Nickelodeon. CBS has slightly higher ratings of Baa2/BBB/BBB.
Spreads on its outstanding 3.875% 2024s rallied by 32bp this week and the growing optimism about the credit was further reflected in the pricing of the new deal on Thursday.
The new bonds priced more than 50bp inside initial price thoughts - one of the most aggressive moves in months in the primary - with US$400m five-year bonds pricing at T+120bp and US$900m 10-year at T+195bp.
At those levels, the bonds came with no new issue concession over Viacom's outstanding bonds.
Part of the attraction for the bonds was the deal structure that protected investors.
During a two-day roadshow this week, the buyside insisted any new deal should have ratings covenants - and the company included just that in Thursday's deal.
If Viacom's ratings fall into junk, the coupon on the debt increases 25bp per agency per notch below investment grade - capped at 2%.
"They said they were committed to their investment grade rating on the calls, but the step-ups showed us they meant it," another investor said.
The investor cautioned the bond spreads could widen if the merger does not happen - but it was a risk many seemed willing to take.
The proceeds from the two-part deal, split between five-year and 10-year tranches, will help the media company boost liquidity and refinance short-term debt maturities.
Bank of America Merrill Lynch, Citigroup and Morgan Stanley were the lead bookrunners. (Reporting by Hillary Flynn; Editing by Natalie Harrison and Shankar Ramakrishnan)