KLA helped restart the new issuance calendar for the investment-grade bond market to finance a multi-billion dollar share buyback, a use of proceeds that has seen a marked decrease this year in the face of growing uncertainty around the global economy.
High-grade offerings earmarked for share repurchases were down 28% to US$45.4bn this year compared to the same period last year, according to Refinitiv data.
BofA Securities, Citigroup, JP Morgan, Scotiabank, Truist and Wells Fargo led the new offering from the Milpitas, California-based semiconductor equipment maker on Tuesday. Bookrunners launched the US$1bn 10-year, US$1.2bn 30-year and US$800m 40-year at Treasuries plus 135bp, 160bp, and 185bp, respectively, coming in 25bp-30bp from initial marketing.
KLA will use most of the bond proceeds, as well as cash on hand and revolver borrowings to pay for a US$3bn share repurchase. At the end of March, it had US$2.58bn of liquidity on its balance sheet.
Funds raised from the offering will also finance an up to US$500m tender offer for its outstanding US$1.25bn of 4.65% 2024 notes.
Though bond investors might frown on the use of debt to funnel cash into shareholders' pockets, analysts said the additional leverage was offset by the company's conservative financial management and the broader growth in semiconductor manufacturing over the past years, which has boosted sales of KLA's wafer fabrication equipment.
"While this is a leveraging transaction, we think the credit profile is well-supported by strong fundamentals in the wafer fab equipment spending cycle," said CreditSights analysts.
S&P lifted the company's rating by a single notch to A- on Tuesday despite the expectation for net leverage to rise to 1x after the bond deal from 0.4x. Moody's had KLA at A2 and Fitch at A-.
Before today's offering, KLA's debt stack consisted of US$3.45bn of bonds and US$275m of borrowings under its revolver.
Market reopening
After seven consecutive sessions of no investment-grade supply, the reopening of the high-grade corporate bond market on Tuesday was led by higher-quality issuers, with all three borrowers in the market today carrying at least a Single A rating.
The two other borrowers in the market, utilities Hanwha Energy and NextEra Energy, were content to focus on front-dated maturities, less vulnerable to the interest-rate volatility that has ravaged demand for high-grade bonds. The 10-year Treasury yield was last seen at a lofty 3.29% on Tuesday, but down from 3.48% on June 14, its highest level since 2011.
In contrast, KLA is issuing a rare 40-year note. The semiconductor company's choice to test the long-end came despite worries the Federal Reserve would keep raising rates at a rapid clip, having delivered on a 75bp hike at its June meeting last week.
Insurance company UnitedHealthGroup was the last high-grade borrower to print a 40-year tenor, as part of a five-part bond deal in May 17.