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October 2010 | ifr special report | 11 US INVESTMENT-GRADE CORPORATES

US dollar and Yankee issuance. Timeline: January — September 27

four-tranche trade in September seemed to be the high-point of this trend. It was only the issuer’s second trip to the investment grade bond market, and it managed to break two coupons records, tie one and only fall slight short on a fourth. Investors, too, are watching coupons, spreads and Treasury prices. “Returns [in this market] have less to do with credit quality and more to do with Treasury prices,” said Jamie Guenther, head of US in- stitutional credit at DP Advisors. The market has been awash with big cor- porations that are also ambitions players in the capital markets. IBM set a record in August with a 1.00% coupon on a three- year note, and Microsoft bested the rate with a 0.875% coupon (the same margin Freddie Mac paid for a three-year benchmark reference note in August). Northern States Power Minnesota, a unit of Xcel Energy, printed a five-year note with a 1.95% coupon, also in August. Microsoft came back with a 1.625% five- year tranche.

In the 10-year category, however, Microsoft took second place with a 3.00% note, behind Johnson & Johnson’s 2.95% coupon from earlier this year. At the long end, Microsoft’s 30-year tied with J&J, San Diego Gas & Electric and Southern California Edison at 4.50%. There was no shortage of historical lows. Bankers and investors don’t expect low coupons to be a thing of the past, however. At its last meeting, the FOMC expressed concern that inflation was too low for comfort and indicated that it might begin a second round of quantitative easing. That would, in effect, keep Treasury yields down, as well as coupons on corporate bonds.

Potential bond issuers need little more incentive than that to refinance. The only roadblock to continued heavy issuance is supply: now that so many issuers have refinanced out a few years, there is less of a pressing need to come to market, no matter how great the technical advantages. “There’s been a lot of refinancing and pre-financing,” BofA’s Probert said. “The big question everyone is asking is how much this reduces supply in 2011?” This way to M&A? It is difficult to predict the volumes for the fourth quarter and next year, in part because this year’s brisk market allowed issuers to push out their maturities beyond


100 200 300 400 500 600

0 2008 Source: Thomson Reuters

2011. But the perennial question mark is M&A-driven business: when will transaction-backed bond offerings return? “M&A is always the wildcard,” a banker


Anecdotally, there is more reason for hope. High-grade issuers are beginning to make and seek acquisitions. On September 27 Southwest Airlines agreed to buy AirTran Holdings in a cash-and-stock transaction worth about US$3.4bn. Southwest was last in the bond market in December 2008. On the same day, Wal-Mart announced that it wanted to buy South Africa’s Massmart Holdings for about US$4.5bn in cash. Also, BHP Billiton is engaged in a US$39bn hostile bid to acquire Potash Corp.

On top of that, there have been well- performing M&A-related deals at the end of the third quarter. Investors have already had a taste.

On September 27, NBC Universal (Baa2/BBB+) hit the market with a US$5.1bn transaction to fund one of the more creative merger transactions of the past few years, its combination with Comcast and eventual separation from General Electric. The media conglomer- ate hit the market with a 144A/Reg S offering comprising four tranches: 3.5s, 5.5s, 10.5s and 30.5s. Demand was well spread out among the tranches and the book drew about US$12bn worth of support.

Proceeds will be used to prefund a cash distribution to General Electric, a

condition of the joint venture between NBC and Comcast. The bond agreement includes mandatory redemption at 101 if the JV does not close by June 10 2011. This is the second time this year NBC tapped the bond market to pay for the Comcast combination. On April 27 it printed a US$4bn three-part trade. On the same day, Exelon Generation, rated A3/BBB/BBB+, printed a US$900m offering of 10s and 31s to fund the purchase of John Deere Renewables, a wind power operator and developer. New issue concessions on both tranches were around 15bp. The book was split US$1bn to the 10s and US$800m to the 31s. Nonetheless, M&A-related trades take some time to materialise. “The fourth quarter will probably be slower than the third,” said BofA’s Probert. “But there could be more strategic deals. For example, if a corporation feels pressure from share- holders they could engage in share repurchases.”

“There are so many companies that have cash overseas and want to return it,” a banker said. One solution is illustrated by Microsoft, which plans to use its bond proceeds for general corporate purposes, including share repurchases. Like many conservative corporations, Microsoft has a lot of cash on its balance sheet – about US$40bn – but much of it is inaccessible because it is held at foreign subsidiaries. Microsoft tapped the bond market to get the cash it needed to give back to share- holders, as well as other US dollar denominated costs.

2009 2010

Total investment-grade, volume (Lhs) Total investment-grade, number of deals (Rhs) Yankee investment-grade, volume (Lhs) Yankee investment-grade, number of deals (Rhs)

No. of deals

100 200 300 400 500 600 700 800


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