Since 2020, Bayer has paid c.$10bn of its original $16bn reserve to resolve 132k Roundup cases in the US, representing c.67% of all cases filed. A positive SCOTUS outcome - which would allow federal law to preempt state law – would materially strengthen Bayer’s legal position ahead of settling the remaining 65k cases, of which we estimate more than 90% are filed in state courts.
We view the likelihood of SCOTUS ruling in Bayer’s favour as >75% given the court’s republican/conservative majority and broader political support. Historically, SCOTUS has ruled in-line with the Solicitor General’s (SG) recommendation and the SG’s position is consistent with consistently stronger Republican vs. Democrat support for Bayer, influenced by a strong US farming lobby.
Following the SG’s recommendation, SCOTUS accepted the case on Jan16th. We expect the court to hear arguments in Apr-26 with a final decision expected in Jun-26. The current court is widely regarded as one of the most conservative in modern history following Trump’s appointment of three justices, resulting in a two-thirds conservative majority.
We reiterate our expectation that Bayer will seek to resolve all outstanding cases by YE26, irrespective of a SCOTUS appeal outcome; in-line with management’s commitment to “significantly contain litigation by YE26”. We estimate that a favourable SCOTUS ruling would reduce total settlement costs to $4-5bn (vs. $8bn) and accelerate settlement timing, whereas an adverse ruling would prolong case-by-case settlements and could incentivise new filings increasing settlement costs to above $10bn.
We expect Bayer to fund a settlement through a mix of debt and equity, but to only raise funds once settlement terms are finalized to reduce the risk of incentivizing further claims. We believe Bayer will consider options to limit near-term pressure on leverage metrics, potentially via (i) gradual payments whereby debt is recognized as payments are incurred, (ii) off-balance sheet options.
In our view, a positive SCOTUS outcome would increase rating agency tolerance for a temporary breach of leverage thresholds compliant with a Baa2/BBB rating in 2026 as long as the group moved towards compliance by YE27.
Given a positive SCOTUS outcome, we estimate that Bayer can raise c.$3-4Bn of additional debt before its ‘BBB’ composite rating comes under pressure. We see any incremental debt increase needing to be skewed towards hybrids vs. seniors (c.60%) and Bayer’s ability to raise senior debt also increases if the company opts to use the equity raise, as this would create additional headroom under S&P’s capitalization ratio.
Given our expectation of a positive SCOTUS outcome - which would remove the group’s largest risk overhang and support the ‘BBB’ composite rating - we see scope for further spread tightening but primarily in $ seniors and € hybrids.
We reiterate our preference for $ vs. € seniors given they trade c.25bps wider on a XCCY – a larger differential vs. peers like Takeda (BBB+/BBB) which trade only 5-10bps wider in $. We see 10-15bps of upside in the 10-30Y vs. our ‘BBB’ fair-value curve, although we believe that a positive SCOTUS outcome could drive spreads through our ‘BBB’ fair value and closer to peers like Nutrien (Baa2/BBB) which implies 20-40bps of upside from current levels.
We recommend to buy $ seniors in the >10Y, which include the following:
- BAYNGR 6 ½ 11/21/33
- BAYNGR 4 5/8 06/25/38
Moreover, we still see further upside for Bayer hybrids although we note that due to the popularity of the extension trade into the BAYNGR 7 NC31, we see limited upside in this bond.
We recommend switching into the BAYNGR 5 3/8 NC30.