Category Archives: Corporate Bonds

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at 11:00am

Corporate debt: Philip Morris shops benchmark bond sale as maturities loom

Facing an imminent debt maturity, Philip Morris International is in the market with a public benchmark offering of two-year, floating-rate notes, along with 10- and 30-year fixed-rate tranches, sources said. Active bookrunners for the issue, which has an expected A2/A profile, are Goldman Sachs, HSBC, and Societe Generale, along with passive bookrunners Barclays and Citi.

Proceeds will be used to meet working-capital requirements, to repurchase common stock, to refinance debt, or for general corporate purposes, filings show.

The company has $500 million of its 3.25% notes coming due on March 13, followed by $2 billion of 4.875% notes due May 16.

In June 2012, the company announced an $18 billion share-repurchase program, and as of Dec. 31, Philip Morris had bought back $2.9 billion of common stock under that authorization. The company had a share-buyback target of $6 billion for 2012, which included purchases under both the June authorization as well as the previous $12 billion share-buyback program.

Philip Morris was last in the bond market in August, when it placed a $2.25 billion, three-part offering split evenly across 1.125% notes due 2017 at T+60, or 1.348%, 2.5% notes due 2022 at T+90, or 2.629%, and 3.875% notes due 2042 at T+120, or 4.014%. Of note, the 2017 issue traded yesterday at 1.2% and at a G-spread of 54 bps, and the 2022 notes traded this morning at 2.58% and at a G-spread of 80 bps. The 2042 issue traded yesterday at 4.15% and at a G-spread of 98 bps, according to MarketAxess.

Earlier this month, the company obtained a $2 billion, one-year senior unsecured revolver for general corporate purposes.

New York-based Philip Morris manufactures and sells cigarettes and other tobacco products internationally.

“Our view of PMI’s ‘modest’ financial risk profile incorporates the highly cash-generative nature of the business. We anticipate that share buyback activity will absorb the vast majority of discretionary cash flows over the medium term,” Standard & Poor’s said in a ratings rationale published in November. The agency maintains a stable outlook on its rating. “Ratings upside is currently constrained by PMI’s commitment to the return of cash to shareholders on an ongoing basis,” S&P added at the time. – Gayatri Iyer

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at 9:56am

Rite Aid, taking advantage of issuers’ market, eyes $1.5B loan refinancing

A lender call has been scheduled for 10:00 a.m. EST to launch a first- and second-lien loan refinancing package for Rite Aid, source said. The issuer is also seeking an amendment to its existing revolver, according to a company statement.

Wells Fargo and Citigroup are left leads on the first-lien and are joined by Bank of America Merrill Lynch, GE Capital, Morgan Stanley and Goldman Sachs. Citigroup and Bank of America are left leads on the second-lien and are joined by Wells Fargo, GE Capital, Morgan Stanley and Goldman Sachs.

Rite Aid is seeking to refinance its $1.039 billion tranche 2 term loan due 2014.  The company is also launching a cash tender offer for the $410 million outstanding under its 9.75% senior secured notes due 2016, the $470 million under its 10.375% senior secured notes due 2016, and the $180.3 million outstanding under its 6.875% senior debentures due 2013. The tender offer will expire at midnight EST on Feb. 28. Under the terms of the tender offer, holders of the notes will receive $30 per $1,000 principal amount of tendered notes.

Rite Aid has obtained commitments for a $1.5 billion revolver. Rite Aid is planning to use proceeds from the amended revolver to back the tender offer and to help refinancing 2014 term loan. The company is also planning to use cash on hand to back the tender offer.

Camp Hill, Penn.-based Rite Aid operates retail drugstores and is rated B-/Caa1. – Richard Kellerhals

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at 3:37pm

HG bonds, chart, analysis: short-term business debt expands steadily in January in steady 2 year rise

While reports this week of a small fourth-quarter contraction in U.S. GDP sent shivers through the markets, U.S. businesses are so far signaling no change of heart in terms of tolerance for short-term debt leverage, Fed data show.

On a seasonally adjusted basis, the Federal Reserve reported $173 billion of outstanding U.S. domestic nonfinancial commercial paper as of Wednesday, up more than $13 billion on the strength of consecutive weekly increases since Jan. 2, while testing the highest levels dating to early 2002.

The measure, which is generally associated with business-activity trends including inventory investment and production, bottomed out at $65 billion at the height of the recession in the summer of 2009.

Steady increases in nonfinancial CP balances come despite a high volume of long-term debt issued in recent months to refinance short-term debt balances. Since long-term Treasury rates reached record lows last July, issuers explicitly cited the refinancing of existing debt as the primary use of proceeds in more than $186 billion of new long-term debt deals, versus $109 billion of such refi-driven deals over the first half of 2012, LCD data show. General Mills this week placed its first deal since early 2011, a $1 billion, three-part offering targeting the repayment commercial-paper borrowings.

The steady increase in CP balances also backstops the nearly uninterrupted two-year rise in the sum of nonfinancial CP plus U.S. commercial and industrial loans, or what is frequently cited by ratings agencies as a broader proxy of short-term leverage tolerance across U.S. businesses. That sum this month reached $1.7 trillion for the first time since the immediate aftermath of the Lehman Brothers collapse, when the measure reached an all-time peak of $1.78 trillion in the fourth quarter of 2008, to a post-crisis low of $1.3 trillion in January 2011. – John Atkins

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at 12:15pm

General Motors readies two revolving credits totaling $10B

A bank group is planning to launch two $5 billion revolvers for General Motors next week, according to sources. The two revolvers will replace a $5 billion revolver due 2015 and be used for working capital. One revolver will have a three-year tenor, while the other will have a five-year tenor.

Pricing is expected to open at L+225.

A bank group including Citigroup and J.P. Morgan is said to be arranging the transaction.

The Detroit-based automaker is rated BB+/Ba1. – Richard Kellerhals

Follow Richard on Twitter @rtkellerhals for Investment-Grade and Pro Rata news

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at 11:00am

Corporate bonds: Blistering September pace slows as spreads trend sideways

As primary-market activity downshifts this morning after dealers placed more than $10 billion yesterday from 11 issuers across 16 tranches – raising the number of individual tranches priced this month to a record-shattering 142 through Monday – secondary-market progressions have also moderated, especially for longer-dated issues, trade data show. Even so, there is no evidence yet of a reversal for spreads, as most recent issues hold near issuance levels.

All three tranches of the United Parcel Service $1.75 billion offering placed yesterday were firm in the secondary market this morning, after the issues were priced on top of indications for comparable secondary-market issues.

The 1.125% notes due 2017, which priced at T+50, traded this morning at a weighted average of T+42, pushing price up to 100.2 and yields down to 1.08%, according to MarketAxess.

But the 2.45% notes due 2022 – the largest of the three issues at $1 billion, and also among the most actively traded deals on the secondary market this morning – traded this morning at either side of the T+75 issue spread and at a weighted average in line with issuance, trade data show.

UPS 3.625%notes due  2042 – one of three long bonds placed yesterday, after just three 30-year issues were placed over all of last week – traded at a weighted average of T+77 this morning, or only modestly through issuance at T+80.

Last week’s largest issue, the $3 billion of 3.25% notes due 2022 placed by JPMorgan Chase last Wednesday at T+155, traded this morning at T+153, on average, and changed hands as wide as the issue spread, trade data show.

New 1.25% notes due 2017 and 2.5% notes due 2022 placed by Vodafone Group last Wednesday at T+62.5 and T+87.5, respectively, broke syndication 4-5 bps through issue spreads, but were changing hands this morning within two basis points of issuance, according to MarketAxess.

And a 3.625% notes due 2022 for Digital Realty Trust, placed last Wednesday at T+200, traded this morning at T+205, or the widest level since the deal broke syndicate.

Heavier conditions for longer-dated issues come after 10-year issues comprise 43% of all issuance volume so far this month, by far the highest percentage this year after deals in that maturity bucket made up roughly one third of all issuance volume over the first six months of 2012, according to LCD data. Deals with maturities of 10-30 years accounted for 54% of all September volume.

The pause in secondary-market progressions is evident at the index level. Through heavy bouts of supply, the Barclays U.S. Corporate Investment Grade index tightened 17 bps over the first three weeks of the month, to T+155. But, over the last five sessions, the index has held in a one-basis-point range.

For reference, that narrow range represents the tightest aggregate spread levels since before the U.S. credit-rating downgrade in early August 2011, and compares with a year-to-date high of T+215 in early June, and a multiyear peak of T+252 in early October last year.

And tighter spreads have also only enhanced funding-cost propositions for would-be borrowers in the weeks ahead, especially further in on the yield curve. Both the 2.87% yield for the broad IG index and the 2.08% yield for the intermediate industrial category represent record-low levels, index data show. Long-dated yields, however, remain roughly a quarter of a point above the all-time lows established two months ago. – John Atkins

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at 10:09am

European rates to go no lower for next 5 years? Bond issuers willing to give up call protection

Last week’s new issues from UPC, Smurfit Kappa, and Techem all offered something different, but it was the tenor and non-call structures on the deals that really stood out, with UPC placing 10-year (non-call five) paper, Smurfit Kappa issuing eight-year (non-call life) FRNs, and Techem coming with a dual-tranche offering of seven-year (non-call three) and eight-year (non-call four) notes.

Long non-call periods of five years or more and non-call life features have become notable facets of issuance since the start of August. During that period, 62% of the deal count has been non-call five or non-call life paper, versus 29% for the year through July (during which time there was no non-call five paper), according to LCD data.

The emergence of non-call five paper has come as established borrowers seek to lock in long-dated funding. Typically, non-call five paper is issued as part of a 10-year deal, and UPC, Unitymedia, and Telenet have all followed this format in recent weeks. Bankers say that secondary curves have flattened recently, meaning long-dated paper is relatively attractive for the best companies.

“Curves have flattened in recent weeks, and for some they are even downward sloping, from seven to 10 years. This means the better borrowers can issue at a lower spread further out, but it is still only for top companies at the moment.”

However, while investors are happy to buy longer-dated paper, as these deals typically offer a yield premium over five-year notes from the same borrower, issuers are effectively gambling that they will not be able to refinance at lower rates in the next five years.

Continental offers a stark example of why issuers might not want to give up the chance to refinance in the short term. Back in 2010, when high-yield was firing and the average primary yield was 8.4% – just as it was for 2012 through July – the company issued six-year and eight-year paper with coupons of 6.5% and 7.125%, respectively.

Earlier this month it issued in the U.S. market, albeit under the better-rated Continental Rubber moniker, raising seven-year money at 4.5%, meaning that in two years it was able to reduce the coupon it pays on seven-year money by roughly 2.5 percentage points.

Nevertheless, it is cheaper for borrowers to issue non-call life paper, bankers say, and they also need to weigh up the cost versus the flexibility. The non-call feature on the FRNs from Smurfit Kappa likely saved it 25-50 bps, or possibly more, according to bankers away from the deal, and also opened the deal up to a broad base of borrowers.

CLOs in particular were attracted to the deal, as it gave them eight-year paper with no refinancing risk, while short-duration high-yield funds were happy that any upside was not capped by a call price.

Despite these attractions, no one really thinks that traditional high-yield deals, such as Techem, will move away from the more standard seven-year (non-call three) or eight-year (non-call four) format any time soon. Sponsor-owned companies in particular will nearly always have a short non-call period, as sources say they value the call highly as it offers greater flexibility for selling the business.

Even single-B corporates will want to keep the flexibility of being able to potentially refinance at a lower rate in a few years, while investors see short non-call periods as evidence that the company will try to deleverage in order to be able to refinance more cheaply in the future. – Luke Millar

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at 12:47pm

Short-term business borrowing continues hot, even as long-term markets surge

Despite clear evidence of a broad economic slowdown over the last two quarters, one measure of short-term business borrowing remains near a three-year high in September, even as borrowers flood the long-term markets to fund an array of needs.

Overall levels of outstanding commercial paper have drifted sideways through the summer deluge of new long-term supply, with the latest $1.02 trillion level little changed, on net, since May, according to seasonally adjusted data from the Federal Reserve. That progression includes modest declines in domestic non-financial CP levels, which at least in part reflects a high proportion of recent long-term debt proceeds targeting short-term debt repayment, as borrowers capitalize on record-low, long-term borrowing costs.

But balances of commercial-and-industrial loans (C&I) – which typically track ebbs and flows in the level of overall working capital and capital spending – are up $168 billion over the last 12 months to $1.46 trillion, or the highest level since the first half of 2009, when borrowing was in free-fall from record-high levels north of $1.6 trillion around the time of the collapse of Lehman Brothers four years ago.

Since bottoming two years ago, the level of C&I loans is up $262 billion, Fed data show. And, when including outstanding amounts of domestic non-financial CP this month, the $1.6 billion of combined short-term business debt is up $300 billion over that span, or 23%.

Against that backdrop, the seasonally adjusted annualized rate of capital spending by U.S. non-financial businesses swelled $110 billion to $1.15 trillion in the first quarter this year from the rate a year earlier, or 11%, Fed data show. That rate was up more than 50% from the recession-era level is spending in 2009 and up 17% from the 2010 total, and in line with the record-high amount of capex in 2007.

Data for spending in the second quarter will be released by the Fed next Thursday. And, while business sentiment clearly eroded in the second quarter as the eurozone debt crisis intensified, any reported changes in the pace of business activity in the spring will come in the context of strong long- and short-term borrowing demand through the subsequent summer months.

Indeed, Fed data show that overall amounts of domestic non-financial CP and C&L loans this month stand 7% higher since the start of the year, and 4% higher since the end of the first quarter. – John Atkins

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at 5:57pm

A $17B day. Corp bond issuance spikes, amid demand, ahead of FOMC meeting

Borrowers adding leverage to their balance sheets to back acquisitions and higher capital spending helped push more new-issue supply into the market today than in any session dating to March 5, which was also a Monday session that went on to become the biggest day in a record-setting $39 billion placed March 5-9. Dealers today marketed roughly $17 billion of new supply for 12 borrowers when excluding sovereign and quasi-sovereign issues, or the most since roughly $18 billion flooded the market on March 5, LCD data show.

For lovers of bond-market trivia, Commonwealth Bank of Australia placed $3.25 billion of new notes today after placing $4 billion in two tranches on March 5, making the bank a key contributor to both of the two biggest single-session volume outbursts this year.

The week’s calendar is widely expected to be front-loaded in deference to the FOMC meeting that wraps up on Thursday and figures to move the markets on monetary-policy headlines.

But pricing terms for most deals today continued to indicate negligible or negative new-issue pricing concessions, as demand for relatively liquid primary paper near par remains seemingly insatiable. That was true for Walgreen, which completed a $4 billion, five-part deal to back its acquisitions of Alliance Boots, which will absorb $3 billion of the proceeds, and USA Drug.

While refi-driven deals remain commonplace with funding costs holding near modern-era lows, deals with clear leverage implications for the borrowers are coming through at a notable clip alongside unsurprising volume of refi-driven issuance with rates holding near record lows. With Walgreen funding aggressive M&A today, ONEOK Partners upsized a planned two-part deal of 2017 and 2022 notes to $1.3 billion, from $1 billion, backing an aggressive, multiyear capex program for its expanding natural-gas-liquids business. Capital spending is projected to total $4.7-5.6 billion through 2015, after nearly doubling over the last 12 months ending June 30, to $1.3 billion, filings show.

And Transocean placed $1.5 billion in 2017 and 2022 notes to facilitate construction of four new ultra-deepwater rigs with enhanced safety features in the wake of the Macondo well blowout.

Other benchmark deals in the market today were at least partially motivated by refinancing incentives, including $2.5 billion for Merck in its first deal in nearly two years to address pension funding and commercial-paper borrowings; $1.05 billion for Dominion Resources to back short-term debt repayment; $900 million for Tyco Flow Control to repay debt and facilitate its spinoff from Tyco and merger with Pentair; $750 million for ConAgra Foods in its first deal since 2009 to address CP balances and other general corporate needs; and $600 million for Clorox for near-term debt repayment. Agilent Technologies, PECO Energy, and Public Service Electric and Gas each placed smaller offerings in the $350-400 million range, also for refinancing purposes.

Borrowers continue to test the lowest funding costs in history. AA/A1 Merck marketed 5.5-, 10-, and 30-year issues at implied yields comfortably among the 10 lowest ever recorded at those tenors, including one of the five lowest yields for a maturity in the five-year bucket, LCD data show. And ConAgra 2.1% notes due March 2018 and 3.25% notes due September 2022 placed today came at coupon rates less than half what it paid for similar tenors in 2009. – John Atkins

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at 1:00pm

Price talk on Merck bond offering suggests strong execution, low coupon

Merck floated guidance for its first offering in nearly two years at levels that suggest both low new-issue concessions and historically low coupon rates. Guidance circulated in the T+55 area for 5.5-year notes, in the T+80 area for new 10-year notes, and in the T+95 area for 30-year notes, as the company seeks funding for pension contributions and refinancing purposes, sources said.

Notably, the midpoint of talk for the 10-year issue is exactly in line with the G-Spread level when the pharmaceutical company’s 3.875% January 2021 notes, placed in December 2010, changed hands this morning, according to MarketAxess.

The midpoint of talk suggests reoffer yields in the 1.19%, 2.48%, and 3.78% areas, respectively. Prints at the tight end of talk would put each reoffer comfortably among the 10 lowest ever recorded, and with the five-year talk within sight of reoffer yields in the 1.06-1.09% range for 0.85% Unilever (A+/A1) and 0.875% Bristol-Myers Squibb (A+/A2) 2017 issues placed in late July that rank as the lowest-ever coupon rates at that tenor.

The AA/A1/A+ issue will carry make-whole call provisions, along with par calls from three and six months prior to maturity for the 10- and 30-year bonds, respectively. The sale is being marketed by BAML, Citi, and J.P. Morgan.

The company plans to use proceeds for general corporate purposes, including contributions to pension plans, repayment of outstanding commercial-paper borrowings, and upcoming debt maturities, filings show. Of note, Merck’s total pension expense last year was $709 million, according to company reports. As of June 30, its commercial paper outstanding totaled $1.1 billion.

Merck has two fixed-rate long-term maturities due next year: $500 million of 4.375% notes due in February and $1.25 billion of 5.3% notes due in December.

The pharmaceutical company has been absent from the bond market since December 2010, when it placed $850 million of 2.25% notes due 2016 and $1.15 billion of 3.875% notes due 2021. The 2016 notes last traded on Sept. 4 at a yield of 0.69% and a G-spread of 34 bps, while the 2021 issue last traded on Thursday at 2.15% and a G-spread of 81 bps, according to MarketAxess.

Earlier today, Standard & Poor’s assigned an AA rating to the proposed sale. “A long history of conservative financial policies and solid cash flows that we expect to exceed capital spending and dividends by over $7 billion in 2012 underpin our ‘minimal’ financial risk assessment for the company. We expect, without an investment need, most of this cash flow will be used to repurchase shares,” the agency said today.

As of June 30, the Whitehouse Station, N.J.-based company had bought back $1.48 billion in common stock under a $5 billion repurchase program that started on April 27. – Gayatri Iyer/John Atkins

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at 2:08pm

Tight pricing? $28B of supply? Corporate bond investors say ‘No Problem!’

Acing the biggest test of demand in six months, investors gobbled up roughly $28 billion of new high-grade supply this week, as participants reported high oversubscription levels despite notably tight pricing execution. And trade data indicated strong follow-on demand in the secondary market this week, setting the stage for an expected continuation of high issuance volume over the balance of the month.

New high-grade deals were oversubscribed by roughly 3.75 times, on average, above an August average of 3.3 times, according to syndicate reports. That allowed borrowers to place issues at spreads just a few basis points above compaarable secondary-market indications, they noted.

While concessions were the highest since June – after deals were consistently placed through the secondary market in July and August – average concessions of about three basis points this week compare favorably for would-be borrowers with an 11-bps average over the first six months of the year, and an average of 21 bps from September-December last year, trailing data show.

As reported, most of the week’s new issues continue to trade 5-15 bps through issuance ahead of the weekend, more than offsetting new-issue concessions, even after underlying yields dropped in the wake of the soft jobs report this morning.

The jump in issuance this week breathed much-needed life into the secondary market, following unusually weak summer volumes. Trading volume was nearly $13 billion on Wednesday and exceeded $14 billion yesterday, the latter representing the highest daily volume since May, according to trade data from MarketAxess.

Volume averaged less than $10 billion last month and only slightly more in July, roughly $1.5 billion less per day than over the same period last year.

But glowing primary-market metrics only underscore the broadening divide between investor participation in the primary and secondary markets, as overall market liquidity remains sparse and seasoned issues often trade at dauntingly high-dollar prices to reflect the plunge in rates this year. New issues dominated the list of most actively traded bonds this week over the last two days, with the 10 most-active issues accounting for 15% of all secondary-market volume yesterday, trade data show.

Participants expect no shortage of choice on the primary markets in the weeks ahead, as broad-market spreads trend sideways at 12-month lows, and after corporate-bond yields touched fresh modern-era lows on the broad market in recent sessions.

Meanwhile, U.S. primary dealers remain largely sidelined as direct participants in the secondary market, which has substantially eroded a historical bulwark for market liquidity. Dealer inventories of all corporate securities fell below $60 billion at the end of August for the first time in more than a decade, after a plunge from more than $100 billion last July ahead of the U.S. credit-rating downgrade and onset of the Eurozone debt crisis, and peak levels nearing $300 billion in 2007 ahead of the financial crisis, according to data from the Federal Reserve Bank of New York.

And dealer positions in long-term corporate securities remain range-bound this year near the decade-low $38 billion established in July, Fed data show. – John Atkins