Boston Scientific makes splash on European debut
Following several acquisitions of European companies, US-based medical manufacturer Boston Scientific has issued its first batch of euro-denominated bonds. David Wigan reports.
Dan Brennan
Boston Scientific is in a demographic sweet spot. An ageing population and increasing longevity is helping it build a global proposition in medical devices, focused on many of the illnesses associated with longer life. Its expertise in non-invasive medicine provides an alternative to surgery and a less expensive, gentler treatment option in areas including cardiology, urology and neurology.
A key element of the Massachusetts-based company’s expansion over recent years has been acquisitions, in which the company has taken stakes in small, innovative companies and looked to help them scale. Boston has made about 12 acquisitions over the past 18 months, including in August 2019 the $4.2bn purchase of UK-based device and drug maker BTG.
“A key element of our strategy is to access higher growth markets, from both a product and geographic perspective,” said the company’s chief financial officer Dan Brennan. “A few years ago we were looking at growth rates of 2% to 3%, whereas now we are in markets that are growing at 5% to 6%, and we think that by diversifying further over the coming years we can push that number higher.”
Debt decisions
To help fund purchases, and minimise its cost of capital, Boston is a regular participant in debt capital markets. Its outstanding debt balance was $7.06bn as of December 31, 2018, compared with $5.61bn a year earlier. The company’s long-term goal is to maintain a debt to earnings before interest, tax, depreciation and amortisation ratio of about 2 to 2.25 times. With recent purchases the ratio has trended upwards to reach slightly more than three times. However, Mr Brennan is confident of a speedy turnaround.
“We have some debt to pay down but we are looking at a little over $2bn of free cash flow over the past year, which means that we should be able to get the ratio back to 2.5 times by the end of 2020, taking into account earnings growth, and 2.25 soon after, while also leaving sufficient free cash for strategic uses,” says Mr Brennan. The company’s weighted average borrowing rate was 3.6% at the end of 2018, compared with 4% two years earlier. It is rated Baa2 by Moody’s and BBB- by S&P Global Ratings.
Given its healthy cash position there was little motivation for the company to add to its bond debt over 2019. However, its balance sheet strategy was driven by its acquisition activity, much of which over the recent period has been in Europe. Given its rising number of euro-based operations, it made sense in 2019 to consider adjusting its wholly dollar-denominated debt to boost its exposure to euros.
“Early in 2019 we started thinking about doing a euro-denominated issue, which would diversify our debt obligations in line with our equity holdings and give us access to a whole new group of investors. We spoke with our bankers about the possibility of accessing European markets, but we wanted it to be leverage neutral,” says Mr Brennan.
Discussions over the northern hemisphere summer led to a plan to issue a €900m 10-year security and at the same time to conduct a tender for up to $1bn aggregate principal amount of outstanding senior notes due in 2023, 2025 and 2028. Barclays Capital, Bank of America Securities and Goldman Sachs acted as the lead dealer managers for the tender offer.
“The 10-year made sense because it was a sweet spot on our maturity curve, which was a good idea for us to fill even if it meant paying a little more for a longer maturity,” says Mr Brennan. “Also, we were happy to try to lock in a low coupon given where interest rates are in Europe at the moment, which was a net positive for our cost of borrowing.”
Whistlestop tour
In the early autumn, the team set off on a pan-European roadshow, visiting five cities in three days. “We had a lot of good interactions and investors were keen to hear about our plans for building out our euro-denominated capital,” says Mr Brennan.
Given the positive experience on the road, the team did not waste any time when it returned to the US to get its bond on the market, and launched the issuance the following week, in early November. It kept its price talk and book details confidential but ended up printing €900m aggregate principal amount of 0.625% senior notes due in 2027 and completing a tender for $1bn.
“We were very pleased with the response from European investors and there was not too much of a new issue premium,” says Mr Brennan. “The book was well over-subscribed and our plan is to stay in close touch with our European investors.” Boston does not have specific plans to come back to the market anytime soon, but having opened a new window, another visit seems highly likely when the time is right.
