Wednesday, 18 July 2018

Visa pays visit to IG bond market with surprise new long bonds

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Visa made a surprise visit to the US high-grade corporate bond market on Wednesday, selling bonds with tenors as long as 30 years in what looks like a change of heart for the company.

In February, the credit and debit card company said it was planning to hold off selling long-term bonds until it got more clarity on proposed reforms on the repatriation of overseas cash.

But on Wednesday Visa announced a US$2bn three-parter that included five, 10 and 30-year tranches. The deal was also Visa’s first bond since a US$16bn debut in December 2015.

Visa’s long-term bond issuance on Wednesday was viewed by some investors as a signal that US corporates were starting to lose hope of any meaningful reforms by the end of the year.

The Trump administration wants to cut the corporate tax rate to 15% from 35%, and introduce a one-time tax on company dollar-denominated earnings that are being repatriated.

But the thinking is that the House could demand revenue neutrality as a precursor for any meaningful tax cuts - especially with the national debt at nearly US$20trn, and a fight over the debt ceiling ahead.

“To achieve revenue neutrality it would require spending cuts that are highly unlikely,” Mark Howard, head of US credit strategy at BNP Paribas, said.

Some investors believe that if the Trump administration did indeed implement reforms, it would be a 2018 event.

They were also not expecting a total overhaul of the tax regime and were instead now betting on a short-term stimulus package in the form of tax cuts.

“The potential for a truly structural reform tax package was downgraded pretty significantly this year,” Jeff Cucunato, head of BlackRock’s US investment grade credit team, told IFR.

The market had already downgraded its expectations seeing the difficulty Congress had with healthcare reform, analysts said.

Congress recently failed in its latest attempt to repeal the Affordable Care Act and replace it with a new version after three Republican senators and all 48 Democrats voted against the bill in July.

“I’m surprised that there wasn’t more of a reaction at the time when you saw how difficult the legislative process was earlier this year,” Cucunato said.

After the healthcare defeat, analysts at Bulltick Research put the probability of comprehensive tax reform passing in the legislative branch at 10%, according to a July report.

Initial price thoughts on Visa’s new bonds were Treasuries plus 70bp area, 90bp area and 110bp area, respectively. Those levels translated to double-digit new issue premiums, ensuring solid interest.

But by guidance, pricing had pulled in by 13bp-15bp across tranches, skimming premiums down on the 10-year to single digits.

The new bonds also have rarity value: the deal could be Visa’s last for a while, as the company’s next maturity is not until 2020, according to CreditSights.

“We would be buyers across the curve, even if (or more likely when) concessions evaporate,” CreditSights analysts wrote on Wednesday morning.

Visa is looking to refinance its outstanding US$1.75bn 1.20% senior notes due December.


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