Monday, 20 May 2019

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UPDATE 2-BAT brings second-largest bond of year

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  • British American Tobacco Cigarette Factory (BAT) in Bayreuth

British American Tobacco brought the second-largest bond of the year to market on Tuesday, but found overstuffed investors were a bit tougher on pricing than they have been in recent weeks.

In the wake of a US$125bn month of supply in July - which included the year’s biggest trade from AT&T - investors were a bit price sensitive towards BAT’s US$17.25bn eight-part trade.

Unlike many recent deals that routinely allowed borrowers to bring in pricing some 25bp from start to finish, BAT only managed to tighten levels 10bp-15bp across the tranches.

The order book at launch was just US$35bn, leaving the deal about two-times covered.

“AT&T is the culprit for why this deal didn’t fly off the shelf,” said Matt Brill, senior portfolio manager at Invesco.

“It’s been a seller’s market for 18 months. There’s finally a bit of a push-back in terms of pricing.”

The deal will help fund BAT’s US$49bn purchase of Reynolds American.

With a euro/sterling piece of the debt financing still expected - perhaps as soon as Wednesday - BAT brought two floating-rate and six fixed-rate tranches to the market Tuesday.

Unlike its last foray in the dollar market in June 2015, when its longest tenor was 10 years, this time BAT went further out to the 30-year part of the curve.

Investor demand was skewed towards the longer end of the curve, according to a lead bank on the deal.

The new trade came to market amid some noise: BAT and its subsidiaries are being investigated for corruption by Britain’s Serious Fraud Office.

But analysts said that backdrop did not seem to have caused much concern for US investors.

“At this point, it’s not a large issue,” said Brian Foster, a senior analyst at CreditSights.

Meanwhile the tobacco sector has been showing some weakness after US regulators announced plans to reduce nicotine levels in cigarettes.

And M&A risk has been elevated on chatter about tobacco industry titans Philip Morris and Altria reunifying, which adds event risk to the equation, Foster said.

Launch of T+130bp on the 10-year suggested the slice is coming with a roughly 7bp-10bp premium to BAT’s outstanding 3.95% 2025s, which were trading at a G-spread of 113bp.

After adding 5bp-10bp for the two-year maturity extension, fair value on the new 10-year bonds came out at G+118bp-123bp.

British American Tobacco carries a Baa2/BBB+ rating from Moody’s and S&P.

It also has an unsolicited BBB rating from Fitch, which downgraded the company two notches following concerns over increased leverage upon the completion of the Reynolds acquisition.

Leads banks on the new deal are BAML, Barclays, Citigroup, Deutsche Bank and HSBC.


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