Friday, 14 December 2018

Yankee Bond

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A fine brew: Anheuser-Busch InBev pounced on one of the best new issue windows in the Yankee market in July to price an opportunistic US$7.5bn transaction with an average new issue concession of negative 10bp and with record low coupons, making it IFR’s Yankee Bond of the Year.

To see the full digital edition of the IFR Americas Review of the Year, please click here.

Non-US issuers have taken about US$311bn out of the US investment-grade bond market year to-date, making it a record year for Yankee deal volume.

Many deals stand out, but none like Anheuser-Busch InBev’s US$7.5bn four-part transaction, led by Bank of America Merrill Lynch, Barclays, Deutsche Bank and JP Morgan.

“There have been a lot of jumbo deals this year,” said a banker at one of the transaction’s leads. “But InBev’s was a US$7.5bn trade that achieved a price you would normally see on a US$3bn deal. I don’t think anyone involved in the trade thought they would get US$7.5bn priced like US$3bn.”

At the time, it was the second-biggest offering of the year, behind United Technologies’ US$9.8bn transaction in May.

The company needed the proceeds to help fund a US$20bn acquisition of the rest of Mexico’s Grupo Modelo it did not already own.

Despite the size of the acquisition, InBev marketed the deal as an opportunistic one that it didn’t need to do, considering its US$24bn of liquidity and expectations of about US$6bn of annual free cashflow.

Its credit story, and a dearth of Single A rated corporate bonds, made the deal exactly what the market wanted at a time when the corporate bond market was being deluged with funds being rotated out of Treasuries.

“People have loved investing in well-known industrials and especially when the issuer’s secondary bonds have been trading at a premium over par,” said Rob Crimmins, a senior portfolio manager at Guardian Life Insurance Company of America.

The deal started out as “benchmark” size, indicating a rough US$3bn–$4bn target and whispers that it was offering about 40bp over Diageo in 10-years.

Initial thoughts on the three, five, 10 and 30-year bonds were respectively mid 60bp area, mid 90bp area, 125bp and 150bp.

A US$26bn book built quickly, enabling the underwriters to tighten guidance up to 25bp from those levels to price talk of around 55bp, 85bp, 110bp and 125bp.

The orders still kept pouring in, with the book peaking at US$30bn and finally shaking out around US$27bn. In the end, 500 investors put in 927 individual orders across the four tranches, with two anchor orders of US$1.47bn and US$1.45bn.

Ultimately the company priced US$1.5bn of 0.8% three-year notes at 50bp; US$2bn of 1.375% five-year notes at 80bp; US$3bn of 2.5% 10-year bonds at 105bp and US$1bn of 30-year bonds at 120bp.

At those levels, InBev had priced its tranches 10bp–30bp tighter than initial thoughts, flat to negative 20bp versus comparables and with an average new issue concession of negative 5bp. That made it the largest deal ever with negative new issue concessions, according to BofA Merrill.

“Other jumbo deals have paid as much as 10bp–40bp premium,” said one underwriter.

The coupons on all four tranches also ranked in the top five in the Thomson Reuters/IFR historical low coupon buckets, and gave InBev a weighted average pre-tax cost of debt of just 2.06%.

InBev essentially repriced its credit curve and locked-in funding costs that were more like those on companies rated one to three notches higher.

It narrowed the gap between itself and Diageo to 18bp in the 10-year part of the curve, priced flat in 10-year to Pepsi and within 5bp of higher-rated Coca-Cola’s 10-year benchmark.

As a result of the deal, InBev lowered the weighted average coupon of its debt portfolio by about 67bp, while extending the weighted average maturity by about half a year.

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