Even with good ratings and a global brand, US tobacco company Philip Morris was taking a risk issuing in the unpredictable Euromarket. It paid off, however, when the company recorded the lowest coupon for a corporate deal.

Philip Morris is one of the largest tobacco companies in the world and manufactures what is probably the best-known global cigarette brand, Marlboro. The group’s products are sold in 180 countries and it is rated A2, A and A by Moody’s, Standard & Poor’s and Fitch, respectively.

Under normal circumstances, its brand recognition and credit rating alone should make it an attractive corporate issuer in the Eurobond market. Circumstances have been far from normal, however. On the one hand, investors have been starved of quality deals, issuance from the corporate sector has been sporadic in 2012 and Philip Morris has rarity value, having last tapped the Euromarket in 2009. On the other hand, the eurozone is in crisis, EU leaders are intractable and market sentiment has been exceptionally hard to predict.

Catering to appetite

In other words, nothing can be taken for granted. But despite volatile conditions Philip Morris, normally a dollar issuer, wanted to tap the Euromarket. “We have euro assets and with a Eurobond issue we create a natural hedge against those assets,” says Marco Kuepfer, vice-president of finance and treasurer at Philip Morris International. “We continuously monitor the capital markets and it was clear that all-in interest costs were at or near historic lows.”

Philip Morris has been fortunate in its timing in the past. The company issued a two-tranche, three- and seven-year deal in 2008, which closed two days before Lehman Brothers collapsed. It then issued a transaction of similar maturities in May 2009, when demand for quality issuers was high. This time, the group was keen to stick with the two-tranche format while extending the maturity profile to seven and 12 years.

“We have been issuing longer-dated bonds in the US and we wanted to continue that trend as interest rates are very attractive at the moment. Issuing two tranches gives us more flexibility too. If investors are keener on one tranche than another, we can shift the relative amounts to cater for their appetite,” says Mr Kuepfer.

Price over size

The deal was launched on May 22, 2012, but Philip Morris began preparing in earnest a couple of weeks earlier. The company has a group of 15 relationship banks and rotates them for different transactions. This particular deal used BNP Paribas, Citi, HSBC and Société Générale as bookrunners.

“We use a core group of relationship banks who participate in our revolving credit and working capital facilities. We calculate and estimate the revenues they are making on the entire relationship and rotate them accordingly for the capital market transactions. We try to have a fair distribution of earnings so the more credit they provide, the more they are likely to participate often in bond transactions,” says Mr Kuepfer.

There has been relatively little corporate issuance lately, no US companies have tapped the Euromarket in a while and we have not issued in Europe since 2009. Investors are looking for a good home for their funds and we benefited from that

Marco Kuepfer

Having mandated its four bookrunners, Philip Morris was in regular contact, assessing the market, analysing sentiment and checking comparative issuance. On Tuesday May 22, 2012, market sentiment seemed relatively positive and Philip Morris seized the opportunity. The initial price range was between 60 and 65 basis points (bps) over mid-swaps for the seven-year tranche and 90bps to 95bps over mid-swaps for the 12-year tranche, and investor response was enthusiastic.

“Demand was overwhelming. We were looking to raise €1.35bn and within an hour we had received orders of more than €3bn. The total order book peaked at €8.5bn and reached more than €5bn for the seven year tranche alone,” says Mr Kuepfer.

Pricing guidance was then reduced to a range of 55bps to 60bps for the seven-year tranche and between 87bps and 93bps for the 12-year tranche. By the time the books closed, orders worth €7.5bn had come in. But the company stuck with the €1.35bn total, divided between €750m at seven years and €600m for 12 years. “We typically go for price rather than size so we aim to issue at the tighter end of the spread,” says Mr Kuepfer.

Matter of minutes

The company certainly achieved its target. Pricing was fixed at 55bps over mid-swaps for the seven-year tranche and 87bps for the 12-year, so the coupons were 2.125% and 2.875%, respectively, a record low for any corporate Eurobond at these maturities.

“We were really pleased with the pricing we achieved. I think it reflected a number of factors. There has been relatively little corporate issuance lately, no US companies have tapped the Euromarket in a while and we have not issued in Europe since 2009. Investors are looking for a good home for their funds and we benefited from that,” says Mr Kuepfer.

The company was, again, extremely fortunate with its timing. “We were quite anxious before the launch because we had heard rumours that a similar rated company to ours wanted to issue on the same day and it was more interested in size than price,” says Mr Kuepfer.

The rumours were correct. French multinational electric utility company GDF Suez came to market with a €3bn three-tranche deal. But its books opened just a few minutes after the Philip Morris books closed – and it paid considerably more.

“We paid a spread of 87bps for 12 years. [GDF Suez] ended up paying 115bps for 10 years. But it raised €3bn in three tranches and that was not what we were after. If GDF had come at the same time as us, it could have had a huge impact on our pricing. But we took the plunge and we were lucky,” says Mr Kuepfer.

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