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November 17, 2017  

Merck Adds to Asset-Backed Bond Dosage

Merck continues to add to its holdings of asset-backed securities.

Officials from the Kenilworth, N.J., drugmaker’s treasury department brought issuers and underwriters up-to-date on its plans in recent weeks, indicating that 2018 could bring an expansion of $200 million to $300 million. That would mark the portfolio’s biggest single-year addition in recent memory.

Merck’s asset-backed bond holdings already were at an all-time high of $1.5 billion on Sept. 30, up from $1.4 billion at yearend 2016. The portfolio also had been approaching $1.5 billion in 2014, but then fell to $1.3 billion at the end of 2015 before entering its current growth phase.

It appears Merck started buying asset-backed bonds in earnest around the beginning of the decade. The portfolio totaled $292 million at yearend 2011, and a year later was at $837 million.

With the more-recent additions have come Merck’s first investments in student-loan bonds — positions it appears to have started taking in late 2016. Before that, the purchases were limited to securities underpinned by auto loans, credit-card receivables and home-equity loans. All of the paper carries triple-A grades, with typical terms of five years or less.

“They told us they’re not done yet. They are aiming to be a bigger buyside participant,” one issuer said.

Merck’s asset-backed bond portfolio was the third-largest component of its $16.2 billion book of available-for-sale investments on Sept. 30, trailing only corporate debt ($10.2 billion) and U.S. Treasury bonds ($1.9 billion). Next year’s investments will represent fresh capital, as opposed to money reallocated from other areas.

That said, Merck appears to be viewing securitized products as offering insulation from recent instability in the corporate-bond market. To that end, industry participants are categorizing the company among so-called crossover buyers who might otherwise seek corporate debt positions with similar ratings and terms.