Wednesday, 12 December 2018

DCM 2006 - Wal-Mart banks on future

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Wal-Mart emerged as a benchmark issuer in 2005 as it tapped the unsecured market for nearly US$8bn, up 62% from the year earlier. While the world’s largest retailer has yet to price a transaction this year, the company may also be on the verge of another significant transformation that could impact the capital markets. Andrew Stein reports.

After attempting to enter the banking business through a variety of transactions over the past decade, it appears the company is on the cusp of receiving a charter as an Industrial Loan Corporation (ILC) in Utah. Wal-Mart faces a slew of opposition from the banking industry, but market participants expect that it will receive the charter given that GE, GM, BMW, Pitney Bowes and Target already have applied for and received the ILC designation.

What is giving the banking industry fits is that, although Wal-Mart has pledged to limit activities under the ILC, it has tried to purchase a deposit-taking entity in the past. And should the ILC application be approved, some participants view it as Wal-Mart's first step to becoming a very large deposit-accepting bank.

"Whether Wal-Mart will eventually get into retail banking is of less immediate importance to us than the perception that they are making progress on their way to getting into retail banking," noted CIBC analyst Meredith Whitney.

Based on the number of Wal-Mart stores open in 2005 and anecdotal estimates of deposits at in-store bank branches, which are owned by outside banks, Wal-Mart could generate US$150bn in retail deposits, placing the bank between US Bancorp and Wachovia in terms of size, according to CIBC.

What an eventual Wal-Mart bank would mean to the debt capital markets is unclear, and any estimates are based on assumptions about what the company intends to do in the future, a practice one credit analyst said he would rather not try to attempt.

If Wal-Mart is allowed to operate as an ILC, it will need US$125m in Tier 1 capital to start. Granted, that is a small figure for Wal-Mart, but that amount is up from US$12m in its original ILC application. An eventual acceptance of deposits could also make the credit a larger player in the floating-rate and swap markets in the future.

Although the impacts of an approved ILC charter might take some time to emerge, Wal-Mart already has become a bellwether name in the credit market. That status was solidified last year with a US$2.5bn 30-year trade that priced during the last full-week before the Labor Day holiday, which is historically one of the slowest issuance periods of the year.

With only US4.136bn in additional supply reaching the market that week, the Wal-Mart deal was regarded as an event transaction. It also led some participants to wonder whether Wal-Mart was timing the market by looking to secure long-term funding before a jump in rates. "We typically don't pay up for 30-year debt, but this 30-year duration was very cheap from a borrower's perspective," said Wal-Mart Treasurer Jay Fitzsimmons following the transaction. "Had we issued in the current rate environment, the 30-year would have cost another 35bp, or roughly US$130m." The 5.25% coupon represents the fourth lowest of any 30-year bond in the Lehman Brothers corporate index and the third lowest of any long bond in the industrial index.

One of Wal-Mart's more notable accomplishments last year was the growth of its international investor base. In addition to overseas roadshows, trades were often left open overnight with priority given to international orders.

Asian accounts received roughly 40% of its US$1bn five-year offering in January, which has been dubbed in-house as "the dragon trade." Wal-Mart's expanding store presence in the region was not said to be a primary driver of the issue, but entering a controlled economy such as China as one of its largest trading partners surely did not hurt the transaction.

Following the 30-year issue over the summer, Wal-Mart had another US$1.5bn left on its funding programme and used underwriters' ever-present desire to top the league tables to its own advantage. In the last week of the third-quarter, Wal-Mart held an auction for underwriters to bid on its last transaction.

"We typically do bought deals at the end of a calendar quarter, and they provide great economics," said Fitzsimmons. "We'll ask the banks what they are willing to pay, using a competitive bid process, and the rate often comes right on top of commercial paper levels."

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