Tobacco companies are accessing the capital markets and receiving strong investor demand for their perceived resiliency through the economic recession.
Marlboro cigarette makers Altria and Philip Morris International each priced similar three-part bonds raising a total of US$4.25bn in back-to-back weeks that received some US$22.4bn in investor demand across the two companies.
Although the economics remain strong for both companies, market participants expressed some shock that cigarette manufacturers would do so well amid a global health crisis that attacks the lungs.
"It knocked me off my socks that a tobacco company has access to the market at all," one syndicate banker away said.
Despite the World Health Organization warning that smokers are at an increased risk of both catching the virus and becoming severely ill, sales were up in the quarter as customers stocked up in anticipation of store closures.
While there could be long-term effects of consumers quitting because of an increased Covid-19 death rate for smokers, so far the industry is benefiting from increased sales, one credit analyst said.
The rating agencies continue to have a favorable view of the sector assigning A3/BBB ratings to Altria and A2/A/A ratings to Philip Morris.
"Altria's strong profitability and stable operating cash flows are underpinned by the relatively inelastic nature of tobacco demand," Moody's said in a recent report.
Likewise CreditSights takes a favorable view of the sector for its resilience through economic uncertainty and its ability to raise prices to offset supply constraints.
While there is some volatility ahead, the tobacco sector is better positioned than other sectors such as cruise and air lines that are more directly impacted by Covid-19.
"We do anticipate some volatility in both pricing and volume trends in the first half of the year due to pantry loading ahead of social distancing measures and expect more normalized patterns in the latter half of the year," CreditSights noted in a recent report.
"Companies in the sector will also be impacted by downtrading as cost conscious consumers turn to lower cost alternatives due to the weak economic backdrop and the industry could also see a pick-up in illicit trade for the same reason."
PRICING LEVELS
Philip Morris priced a US$2.25bn three part bond on April 29 drawing US$9.7bn in investor demand.
That allowed bookrunners Citigroup, Goldman Sachs and Mizuho to tighten spreads by 30bp-45bp through price progression to give up just 1bp-3bp of new issue concessions over its secondary curve, according to IFR calculations.
Philip Morris' transaction was evenly split at US$750m per tranche pricing a three-year at 100bp over Treasuries, a five-year at 125bp over and a 10-year at 155bp over.
Altria similarly priced a US$2bn three-part bond on Monday May 4 garnering an order book of US$12.7bn.
That strong demand allowed bookrunners Barclays and Goldman Sachs to tighten spreads by 40bp-45bp through price progression.
Altria priced a US$750m five-year at 200bp over, a US$750m 10-year at 280bp over and a US$500m 30-year at 320bp over.
While Philip Morris priced tighter to Altria with higher ratings, there is some greater upside to Altria for those who take a favorable view on its diversified portfolio into smokeless products such as its investments in Juul, according to CreditSights.
Altria bonds are tightening by 20bp-27bp in the secondary.
Philip Morris bonds have tightened by 12bp on the short end, but actually are trading some 6bp wide of pricing levels in the secondary, according to MarketAxess data.