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Apple eyes relatively steep curve for record $17B bond offering

Apple formally launched a $17 billion offering across six tranches under an AA+/AA1 profile to establish the largest corporate-bond offering on record as it embarks on a plan to return $100 billion to shareholders through 2015, sources said. However, the issuer is on track to pay more for longer-term funds than other high-profile borrowers in recent sessions.

With press reports suggesting an order book at least three times the offering amount ahead of launch, spreads were set at the firm end of guidance and 15-20 bps through initial whispers, including at L+5 for $1 billion of three-year, floating-rate notes and at T+20 for $1.5 billion of three-year, fixed-rate notes; at L+25 for $2 billion of five-year, floating-rate notes and at T+40 for $4 billion of five-year, fixed-rate notes; at T+75 for $5.5 billion of 10-year, fixed-rate notes; and at T+100 for $3 billion of 30-year, fixed-rate bonds.

Apple is on track to establish a yield curve at initial fixed-rate reoffers near 0.5% for three-year notes, 1.07% for five-year notes, 2.42% for 10-year notes, and 3.88% for the long bonds.

The cash-rich company should secure the lowest-ever funding costs for a three-year maturity, tucking in under the 0.58% reoffer for Unilever Capital (A+/A1) 0.45% notes due 2015 inked last July at T+27, or 0.58%.

But longer tranches appear to be offered more generously relative to recent new issues. Under a lower AA-/Aa3 profile, Colgate-Palmolive yesterday offered five-year 0.9% notes at T+32, or 1%, and 2.1% 10-year notes at T+60, or 2.27%. Nike (A+/A1) placed 3.625% 30-year bonds on April 23 at T+75, or 3.64%.

After S&P and Moody’s last week assigned corporate credit ratings just shy of triple-A status, Fitch yesterday articulated a rationale for a relatively steep yield curve for the credit. While Fitch didn’t assign a rating on Apple prior to launch, it noted that “such a rating would likely fall in the high single ‘A’ rating category,” according to an April 29 report.

“Consumer product companies such as Sony, Nokia, and Motorola Mobility have proven the risks related to ever-changing consumer tastes, low switching costs, and a highly competitive environment,” Fitch analysts noted. “Each has historically had a dominant market position and strong financial metrics, only to falter over a relatively short period of time.”

“Fitch’s ratings ultimately hinge on the volatility of a business model, since the typical bond investment period can extend beyond several product cycles, while also considering financial metrics and liquidity,” analysts noted. “For ratings in the ‘AA’ category, we would insist on higher visibility and a longer time horizon regarding the sustainability of a company’s business model.”

When excluding volume related to a one-year tranche issued by Roche Holding in 2009, AbbVie last year inked the biggest bond deal on record at $14.7 billion to facilitate its spin-off from Abbott Laboratories. Of the 10 largest deals placed last year, only a $6.175 billion deal inked by Intel on Dec. 4 directly backed share repurchases, LCD data show.

After facilitating investor calls yesterday, Goldman Sachs and Deutsche Bank will act as bookrunners for today’s offering. Each of the fixed-rate issues carries a make-whole call provision. – John Atkins

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Debt-averse Apple sets 6-part bond deal to establish funding yield curve

Apple today filed to offer an SEC-registered, six-part benchmark transaction intended to establish a bona fide yield curve for the high-profile, but historically debt-averse borrower, as it embarks on an aggressive shareholder-return plan. The total bond-offering size has yet to be determined, but speculation over the last week has leaned toward an historic debut amount.

On April 23, Apple officials said on the debt-free company’s earnings call that “we will access the U.S. debt markets over time,” as it prepares to return roughly $100 billion to shareholders through calendar-year 2015. The plan is expected to weigh on domestically domiciled cash balances, as the company resists repatriating material amounts of offshore cash due to tax implications.
The announcement prompted ratings agencies to assign AA+/Aa1 debt ratings. Triple-A ratings appeared to be constrained by Apple’s weighting top offshore cash in its $140-billion balance of overall cash and marketable securities, though market participants note that demand indications and early talk indications suggest Apple will be treated as a top-tier credit as accounts compete to add the previously debt-free name to portfolios.

“We expect Apple to maintain cash and marketable securities in excess of $100 billion, with the majority of balances remaining offshore (and thus subject to repatriation taxes),” S&P analysts wrote in ratings rational published last week. “We expect Apple’s increased commitment to shareholder returns to be skewed toward share repurchases, that shareholder returns will continue to be re-assessed over time, and that the company will manage leverage below 1x.”

Apple today filed to sell three- and five-year issues in both fixed- and floating-rate formats, along with fixed-rate, 10- and 30-year issues. Initial whispers circulated in the L+20 and T+35 areas for the three-year issues; in the L+40 and T+55 areas for the five-year issues; in the T+90-95 range for the 10-year issue; and in the T+115-120 range for the 30-year issue.

The midpoints of initial price talk levels point Apple to fixed-rate reoffer yields in the 0.65% area for three-year notes, the 1.21% area for five-year notes, the 2.57% area for 10-year notes, and the 4.01% area for 30-year bonds. Talk is expected to tighten over the course of marketing today, which could put Apple on track for the lowest-ever costs recorded for a three-year maturity, currently held by Unilever Capital (A+/A1) after it inked 0.45% notes due 2015 last July at T+27, or 0.58%.

For reference, low reoffers recorded so far this year include 0.62% for three-year 0.6% Wal-Mart notes (AA/Aa2) issued April 4 at T+30; 1% for Colgate-Palmolive‘s five-year 0.9%  notes (AA-/Aa3) issued yesterday at T+32; 2.27% for Colgate-Palmolive’s 10-year 2.1% notes (AA-/Aa3) issued yesterday at T+60; and 3.64% for Nike‘s 30-year 3.625% bonds (A+/A1) issued Apr. 23 at T+75.

After facilitating investor calls yesterday, Goldman Sachs and Deutsche Bank will act as bookrunners for today’s offering. Each of the fixed-rate issues carries a make-whole call provision.

Proceeds back general corporate purposes, including share repurchases and dividends under the recently expanded plan to return cash to shareholders, according to regulatory filings. “On April 23, 2013, we announced that we increased our existing share repurchase program authorization from $10-60 billion and raised our third quarter 2013 cash dividend by 15%,” the company said.

For reference, last year’s largest bond offering was from AbbVie, at $14.7, billion to facilitate its spin-off from Abbott Laboratories. Of the 10 largest deals placed last year, only a $6.175 billion deal inked by Intel on Dec. 4 directly backed share repurchases, LCD data show. – John Atkins

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Rent-A-Center high-yield bonds price at par to yield 4.75%; terms

Rent-A-Center today completed an offering of senior notes via bookrunners J.P. Morgan and Goldman Sachs, according to sources. Pricing came inside of talk by 12.5 bps and at the target size of $250 million. Proceeds from the deal will be used to repay $46 million of revolver borrowings, with the balance earmarked for common-stock repurchases and general corporate purposes. The company announced on Friday that its stock-repurchase plan was increased to $1.25 billion, from $1 billion. Approximately $795 million has been used to buy back stock under the plan since its inception. S&P today downgraded by one notch Rent-A-Center’s corporate credit rating, to BB, and its senior unsecured debt, to BB-, citing high-than-expected debt levels. Rent-A-Center, based in Plano Texas, leases household durable goods to customers on a rent-to-own basis. Terms:

Issuer Rent-A-Center
Ratings BB-/Ba3
Amount $250 million
Issue senior notes (144A)
Coupon 4.75%
Price 100
Yield 4.75%
Spread T+364
FRN eq. L+343
Maturity May 1, 2021
Call nc3; 1st call @ par +75% of coupon
Trade April 29, 2013
Settle May 2, 2013
Joint Bookrunners
Co-leads
Co’s.
Px talk 4.875-5.125%
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Refinancings dominate high yield bond issuance; LBOs, M&A fall short

high yield bond volume by purpose

It will be no surprise to any institutional investor or high yield bookrunner that refinancings have dominated U.S. high yield bond issuance so far in 2013. Indeed, more than half of the $114 billion priced this year takes out existing leveraged loans or high yield debt, with increasingly thin yields on offer (Barron’s Michael Aniero reports today that junk bond yields hit another record low – 5.289%).

Largely missing from the mix of deals are the highly profitable M&A/LBO transactions, which comprise only 16% of transaction volume so far this year.

This chart details high yield bond issuance in the U.S. from Jan. 1 through April 25.

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JC Penny Bonds Rocket in Trading as Co. Nets $1.75B Loan to Repay Debt

J.C. Penney 7.125% notes due 2023 traded up 36 points, to 139, and settled in the low 130s on news the CCC+/Caa1 paper would be “discharged” with proceeds from a new credit line, trade data show. Other issues from the struggling retailer traded modestly higher, like the 7.95% notes due 2017, which added four points, to a par context, and 5.65% notes due 2020, which changed hands three points higher, at 86.5, the trade data show.

Five-year CDS in the name contracted roughly 12% on the news, at 10.75/12 points upfront, according to Markit. That’s essentially a $156,000 lower upfront payment, at about $1.44 million, in addition to the $500,000 annual payment, to protect $10 million of JCP bonds. Recall the CDS had gapped out as wide as 18.5 points upfront after disappointing financial results in March.

JCP shares added just about 2%, at $17.33.

J.C. Penney disclosed today that it has obtained a commitment letter from Goldman Sachs, providing a $1.75 billion, five-year senior secured term loan that is secured by real estate and other company assets. Proceeds are available for working capital and general corporate purposes, which could include “acquire or satisfy and discharge” the company’s outstanding 7.125% notes due 2023, according to the company statement.

On April, 15, J.C. Penney announced that it drew down $850 million from a $1.85 billion asset-based revolver due 2016 to fund working capital requirements and capital expenditures, including the replenishment of inventory levels ahead of next month’s anticipated completion of the renovated home departments. The revolver was arranged by J.P. Morgan, Bank of America Merrill Lynch, Barclays, and Wells Fargo. Pricing on the revolver is tied to a ratings-based grid, ranging from L+150-300, with a commitment fee ranging from 25-50 bps. Based on J.C. Penney’s CCC+/Caa1, all in pricing appears to open at L+350.

In February, J.C. Penney increased the size of the revolver by $100 million, to $1.85 billion, via an amendment.

As of Feb. 2, the company had a cash balance of $930 million, which was reported in its full-year results, versus $1.5 billion a year earlier, an SEC filing shows.

J.C. Penney is a fallen-angel issuer, with negative outlooks on both sides. “In our view, the board’s decision to make a leadership change by bringing back the former CEO underscores the severity of the operational issues at the company,” S&P stated in a report earlier this month, adding that it expected the company to seek additional capital or borrow under its revolver to fund operations due to “less than adequate” liquidity.

J.C. Penney posted net sales of $12.985 billion in the fiscal 2012 year ended Feb. 2, 2013, for a 25% decline year over year, based on a 25% decline in comparable-store sales and a 33% decline in online sales. Results turned out a loss of $3.49 per share, which was more than double the consensus mean estimate by S&P Capital IQ for a loss of $1.52 per share. – Matt Fuller/Richard Kellerhals

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Setting stage for issuance boom, Europe high yield funds see €153M inflow

J.P. Morgan’s weekly analysis of European high-yield funds shows a €153 million inflow for the week ended April 24. Of this influx, €1 million is attributable to ETFs. The reading for the week ended April 17 is revised from a €74 million inflow to a €69 million inflow. The provisional reading for March is an inflow of €579 million. This compares with a €156 million outflow in February, and a €1.8 billion inflow in January. The latest estimate for total inflows during the first quarter is €2.3 billion.

The latest reading is the first triple-digit weekly inflow since the week ended March 13, and provides a foundation for a surge of issuance this week. A total of nine deals are due to price this week, making it the busiest this year by deal count. The nine deals are Bond Mission Critical Services,BrightHouse, Gestamp, Hellenic Petroleum, Kloeckner Pentaplast, Medi-Partenaires, New Look, R&R Ice Cream, and Towergate.

In the U.S. there was a net inflow of $521 million to high-yield mutual funds and exchange-traded funds in the week ended April 24, according to Lipper, a Thomson Reuters company. This is the largest inflow into the asset class in seven weeks, and is more than double the prior week’s $242 million reading. It is also the fourth largest of 10 reported weekly inflows so far in 2013. Unlike the prior week, inflows between ETFs and mutual funds were fairly even – ETF activity netted $252 million, while the ex-ETF figure was $269 million. Lipper data show a net year-to-date inflow of $1.23 billion, versus an inflow of $15.5 billion in the year-ago period.

Retail-cash inflows into bank loan mutual funds and ETFs totalled $1.11 billion for the week ended April 24, according to Lipper FMI. That’s an expansion from $790 million the week before, and it’s the 45th positive reading for a huge inflow streak totalling $24.5 billion. ETFs accounted for roughly a third of the inflow, at $354 million. Looking at results in the year to date, inflows are $17 billion, with $14.8 billion to mutual funds and $2.2 billion directed towards ETFs.

As reported, J.P. Morgan only calculates flows for funds that publish daily or weekly updates of their net asset value and total fund assets. As a result, J.P. Morgan’s weekly analysis looks at around 50 funds, with total assets under management of €10 billion. Its monthly analysis takes in a larger universe of 90 funds, with €27 billion of assets under management. For a full analysis, please see “Europe receives HY fund flow calculation.” – Luke Millar

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Resolute Forest bonds price wide of talk, at 99.1 to yield 6%; terms

Resolute Forest Products this afternoon completed an offering of senior notes via bookrunners Bank of America, Citi, and BMO, sources said. Terms on the BB-/Ba3 transaction were finalized 25 bps higher than price talk, though at the target size, but an early read from the gray market points to a modest follow-on demand for the break, sources note. Proceeds will be used to fund a tender for $501 million of 10.25% secured notes due 2018 and for general corporate purposes. Resolute Forest Products, formerly known as AbitibiBowater, originally issued $850 million of the 10.25% notes in September 2010. The deal was part of Abitibi’s exit from bankruptcy, and proceeds were earmarked to repay existing secured debt.

Note the new deal structure is 10-year maturity with a four-year non-callable period, with the first call price at par plus 75% of the coupon. While seven-year (non-call three) and eight-year (non-call three) structures have become the fashion of late, this is just the third short call on a 10-year deal in the year to date, according to LCD, a division of S&P Capital IQ. Terms:

Issuer Resolute Forest Products
Ratings BB-/Ba3
Amount $600 million
Issue senior notes (144A)
Coupon 5.875%
Price 99.062
Yield 6%
Spread T+434
FRN eq. L+416
Maturity May 15, 2023
Call nc4 @ par+75% coupon
Trade April 26, 2013
Settle May 8, 2013 (t+8)
Books BAML/CITI/BMO
Co’s. Barc, JPM, WF
Px talk 5.5-5.75%
Notes first call at par+75% coupon; wide of talk 25 bps.

 

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High yield bond market logs $4B this week; YTD volume = $114B

high yield bond volume weekly

The U.S. high yield bond market continued its somewhat leisurely pace this week, pricing $4 billion in deals through yesterday. Year to date the market has seen $114 billion in issuance, almost identical to the amount seen during the same period in 2012.

As has been the case for much of 2013, refinancings were the thing this week. Most notable: Germany’s Schaeffler completed an $850 refinancing that highlights just how compelling to issuers the credit markets are right now. The move cut the company’s borrowing costs by a whopping 3.5 percentage points from just a year ago, according to Luke Millar, who wrote about the deal for LCD News (link for LCD News subscribers).

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Europe: Ziggo share price falls, bonds hold, on sponsor stake sale

Ziggo‘s share price is down nearly 7% today, but its bonds are unchanged, on news that its owners Cinven and Warburg Pincus are selling their remaining stakes in the business. The company’s 6.125% notes due 2017 and 8% notes due 2018 are currently quoted around 105 and 109, respectively, according to sources.

The sponsors today launched an offering for up to 27 million shares, with a possible upsizing of 7.2 million, which would account for its full 17% remaining stake.

Market sources say the development currently has little impact on bondholders, as the company itself will not receive any of the proceeds from the sale.

Looking further ahead, some analysts believe this offers another opportunity for Liberty Global (LGI) to increase its stake in Ziggo. Bondholders would probably view such a development as credit negative, however, as LGI tends to re-lever its businesses back to the 4.5-5x range, sources add.

At the end of March, LGI purchased a 12.65% stake in Ziggo, leading the issuer’s notes to slip slightly. The market did not appear to price in the likelihood of LGI making a move to acquire Ziggo in full. LGI is already undertaking the jumbo takeover of Virgin Media.

Earlier this year Ziggo completed a loan and bond refinancing to repay outstanding debt. It was formed through the combination of Multikabel, Casema, and Essent Kabelcom, and is the largest cable operator in the Netherlands, with a 55% share of the Dutch cable market. The bond issuer, Ziggo Bond Company, is rated BB/Ba1. The TLE is rated BBB-/Baa3. – Luke Millar

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High yield mutual funds, ETFs see largest cash inflow in 7 weeks

There was a net inflow of $521 million to high-yield mutual funds and exchange-traded funds in the week ended April 24, according to Lipper, a Thomson Reuters company.

This is the largest inflow into the asset class in seven weeks and is more than double last week’s $242 million result. It is the fourth largest of 10 reported weekly inflows thus far in 2013. It lifts the four-week trailing average to its highest level since Jan. 30, at $179 million, from $57 million previously.

Unlike last week, inflows between ETFs and mutual funds were fairly even. ETF activity netted $252 million while the ex-ETF figure was $269 million.

Lipper data shows a net year-to-date inflow of $1.23 billion, versus an inflow of $15.5 billion in the comparable period a year ago. Note that this year’s reading would be slightly larger if not for the ETF outflows of roughly $131 million, while the year-ago report is bolstered by $6.4 billion of ETF inflow.

Net assets of the weekly reporter sample were $168 billion at the end of the observation period, with ETFs representing about 20% of the total, or $32.8 billion. Net assets are up $6 billion in the year to date, or a gain of roughly 4%. – Jon Hemingway