Prodigious Corporate Deal

August 8th, 2017 8:58 am | by John Jansen |

Via Bloomberg:

The Smoking Hot Bond Deal of the Summer Is On Its Way: Gadfly
2017-08-08 10:20:28.782 GMT

By Marcus Ashworth and Mark Gilbert
(Bloomberg Gadfly) — It’s enough to give any treasurer a
smoker’s cough: launching the third-biggest fundraising ever
during the August lull, in an industry that’s been roiled by
regulators, by a company that’s just suffered a two-step rating
downgrade.
Company may raise
$25 billion
Not a problem for British American Tobacco Plc.
It’s in the process of raising $25 billion in what may be
the largest corporate bond offering of the year. The maker of
Lucky Strikes wants to refinance its 42 billion-pound ($55
billion) buyout of Reynolds American — a deal which will give
it No. 1 position in tobacco-related products globally.
The offering should eclipse AT&T Inc.’s $22.5 billion
offering just two weeks ago, which saw investors order as much
as $60 billion of the securities. BAT will want to get orders
for at least as much, if not more.
It shouldn’t be a struggle for a tobacco company. Like
hardened smokers, investors have a craving for yield. So expect
BAT to offer buyers a healthy premium over comparable debt. The
summer slowdown leaves the playing field empty, something that
should play in BAT’s favor.
Deals of this size will feature prominently in the
corporate bond indexes so investors are almost obliged to buy
them — though ethical bond funds will sit this one out. The
extra spread on offer from the new issue also offers tantalizing
out-performance potential in an otherwise moribund credit
market.
With corporate spreads edging ever closer to record lows,
investors are starved of product. Moreover, the European Central
Bank is still buying. It now holds more than 103 billion euros
in corporate debt. The effect on BAT is indirect — the ECB
can’t hold its bonds — but the relative scarcity of equivalent
BBB debt has the effect of tightening spreads on BAT’s bonds.
One fly in the ointment was the two-notch downgrade from
Fitch Ratings on Friday to BBB from A-. This was largely due to
the increased leverage from assuming Reynolds’s debt, but with
free cash flow of more than 2 billion pounds each year, the
ratings company doesn’t have wider concerns on the debt.
Furthermore, the move just brings Fitch into line with S+P’s
BBB+ and Moody’s Baa2 ratings.
Last month, shares of tobacco companies slumped after the
U.S. Food and Drug Administration committed to reducing the
level of nicotine in cigarettes to non-addictive levels. BAT was
down almost 11 percent at one point, its biggest one-day drop
for 17 years, before rallying to end July 28 with a 7 percent
slide.
The FDA move, though, may work in BAT’s favor by driving
more Americans to alternative technology such as vaping and
heat-not-burn devices. The global vaping market is worth $12.3
billion, according to data compiled by Euromonitor. North
America accounts for 36 percent of global sales, and Reynolds
has almost as much of the U.S. market for electronic smoking
devices as its next three biggest rivals put together, according
to data compiled by Bloomberg Intelligence analyst Duncan Fox.
With such demand from yield-starved credit investors, BAT
should be able to pull off the deal of the summer.
This column does not necessarily reflect the opinion of
Bloomberg LP and its owners.

To contact the authors of this story:
Marcus Ashworth inLondon at mashworth4@bloomberg.net
Mark Gilbert inLondon at magilbert@bloomberg.net
To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net

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