Zoetis, Goldman Sachs prolong high-grade party

Fri Jan 18, 2013 12:19pm EST

Jan 18 (IFR) - Zoetis and Goldman Sachs drew huge orders for their new bonds this week, showing demand for US high-grade paper remains red-hot despite recent indications that investors are increasingly turned off by the relatively meagre returns available.

Zoetis, a unit of Pfizer, on Wednesday sold its debut bond offering, a US$3.65bn four-part deal. The order book of about US$30bn allowed it to sharply tighten pricing from original guidance.

On the same day Goldman Sachs printed a self-led US$6bn three-part trade that had a US$15bn book.

"The response to these deals was ridiculous," said one senior banker.

"Receiving orders north of US$30bn for Zoetis is a staggering result. This demand is clearly at odds with all that speculation that investments are moving out of bonds into equities and that the high-grade issuance party is over. Clearly it is not over yet."

After these latest two deals, bankers are wondering whether they were hasty in calling an end to the flurry of issuance seen in the high-grade market over the past couple of years.

In recent weeks, many bond deals have priced with wider new issue concessions, and bankers have been increasingly talking about an absence of momentum in investment-grade credit.

Reasons for the wariness include an unexpected gush of issuance in the first two weeks of January and uncertainty about the direction of interest rates. Yields were also touching new lows and a sell-off in US Treasuries - even as corporate spreads have tightened - has meant total returns on high-grade investments have turned negative.

As of January 16, the yield-to-worst for high-grade paper was 2.73%, near the all-time lowest level, while the year-to-date total return for high-grade investments is a negative 0.11%. Those who invested in high-yield, on the other hand, are sitting on a year-to-date return of 1.31%.

Barclays analysts captured that increasingly negative view of investment-grade debt.

"We think recent weeks have supported our underweight allocation to investment-grade credit. Our view since last September has been that the additional spread offered by global credit is insufficient to compensate for the lack of liquidity, particularly in the higher quality credits, leading us to favour the high-yield segment of the market," the analysts said in a report.

AUSPICIOUS DEBUT

The response to Zoetis and Goldman might suggest that not every investor shares that view, though there are specific reasons for piling into the former's debt.

The deal came a day before Zoetis - one of the world's biggest animal health and vaccines businesses - said it expected to price its IPO of 86.1m Class A shares at between US$22 and US$25 per share to raise US$2.15bn.

Pfizer will exchange Zoetis Class A shares with affiliates of the underwriters for outstanding indebtedness of Pfizer. The underwriters would then sell the shares in the offering and they, and not Zoetis or Pfizer, will receive the proceeds.

Baa2/BBB- rated Zoetis had revenue of US$4.2bn for the year ended December 31. It sold products in more than 120 countries and across eight core species and five major product categories.

"Though the bonds were rated Triple B minus, the fact that much higher-rated credit Pfizer would still hold about 80% in the company made the bonds attractive," said one banker.

"Yes, the risk entailed in the transaction was that Pfizer was looking at an exit from the company. But for now it looked like a decent deal coming from a company operating in a sector that had no representation in terms of outstanding bonds."

The pre-IPO bond transaction saw Zoetis selling three-, five-, 10- and 30-year bonds. Initial price talk was for Treasuries plus 125bp on the three-year, plus 150bp on the five-year, plus 175bp on the 10-year and plus 205bp on the 30-year.

These levels were tightened and the bond sizes set at US$400m of three-years at plus 80bp; US$750m of five-years at plus 115bp; US$1.35bn of 10-years at plus 145bp; and US$1.15bn of 30-years at plus 175bp. In the end, Zoetis priced the deal around the level of other pharmaceutical comparables.

Goldman made its move the same day with an unusually late deal announcement following the completion of an analyst conference call to go over its stellar earnings. Rated A3/A-/A-, it ended up pricing a US$6bn three-part that included a tap of outstanding 1.6% November 2015s. The demand was huge for the transaction enabling the bank to price its bonds with new issue concession ranging from a negative 5bp to flat to outstandings.

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