LONDON - Novartis AG (NOVN.VX) is likely to disappoint loan and bond market hopes of a $16 billion financing bonanza from its take-out of U.S. eyecare firm Alcon Inc (ACL.N), opting instead for cheaper ultra-short-term commercial debt.

Investment banks say they are pitching hard financing options to Novartis, with the hope of winning a share of lucrative fees from the Alcon deal.

Those options would involve bonds, loans and commercial paper or a combination of all three.

The Basel-based group offered minority investors in Alcon inferior terms to majority stakeholder Nestle SA (NESN.VX) -- $147 per share versus $180 -- and minorities are pushing Novartis to sweeten the terms or risk legal action, which could increase the total financing to over $39 billion, of which $16 billion would be externally sourced.

A Novartis spokesman said the company would look to raise the money in coming months and, assuming the deal closes in the second half, said the company had plenty of time to optimize our entry into the debt markets.

Said a senior loan syndicator: This is the kind of business that the loan market is gagging for ... Novartis is well rated and loans would give more flexibility should they want it, it wouldn't have to be refinanced with a big chunk of bonds straight off.

While companies traditionally fund acquisitions with bridge loans before refinancing into longer-term debt, however, the Swiss pharma group may follow sector peers Roche Holding AG (ROG.VX) and AstraZeneca Plc (AZN.L) and eschew bank borrowing.

The latter got interim financing in 2007 for the $15.3 billion purchase of Medlmmune via the commercial paper (CP) market, while Roche went straight to the bond market a year ago to pay for its $46.8 billion buyout of Genentech.


Not only is CP financing cheaper than both bonds and bridge loans, Novartis' strong credit profile would attract keen interest in the United States, said a money market banker.

Novartis, or any other well-known industrial, could raise significant amounts in the USCP market at sub-Libor levels.

The official suggested Novartis could pay an absolute yield of up to 0.2 percent, although the average maturity for such borrowers is typically 40 days so the company would have to roll over the debt regularly.

While there is refinancing risk associated with such short-term funding, Novartis will weigh that against the high cost of one-year loans, at around 100 basis points over mid-swaps, and bonds. Novartis 10-year bonds currently yield 4.5 percent.

At present, the USCP market totals around $1.2 trillion, but with only $100 billion from non-financials, Novartis would be welcomed by money market funds flush with cash if it opts to enlarge its $5.5 billion CP program, said bankers.

When you look at the timing of the acquisition, which is later in the year, and factor in the rate of cash generation and its big CP program, which could be increased, it's unlikely that we'll see anything like $16 billion in bonds, said the senior debt capital markets banker.

Bond market players in particular should not be too downhearted, said a debt syndicate head: I would be surprised that anybody with that kind of size to finance would do it all in CP, long term.

Another Europe-based banker suggested a fifty-fifty split between bonds and CP, although the timing and composition of the possible bond issue is very much up in the air.

At present, dollar funding looks efficient compared to other currencies, he said, although Novartis was not expected to come to market immediately and a lot depended on its view on U.S. dollar bond yields over the course of the year.


Whichever funding method wins out, however, the size of Novartis' funding appetite could end up being a lot less than the stated $16 billion requirement.

The deal is expected to close in the second half of 2010, giving Novartis at least six months to build up a cash warchest and lessen its need to tap credit markets.

Novartis tapped debt markets twice last year to help pre-fund its long-expected take up of the option on Alcon, and by end-September, 2009, had $14.2 billion in cash -- enough to finance half the deal, said analysts at UniCredit.

The company's strong free cashflow could boost this pile even more before it needs to pay for the Alcon deal.

Novartis had free cash flow of $7.7 billion in the nine months to end-September, 2009, giving a quarterly average of nearly $2.6 billion and suggesting it could add at least $5 billion to its cash reserves before the deal closes.

(Additional reporting by Tessa Walsh; Editing by David Holmes)