Ashland pushes closer to investment-grade with new bonds

Thu Feb 21, 2013 4:37pm EST

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Kentucky-based Ashland, a Fortune 500 name, sold US$2.3bn worth of debt in a four-part bond deal that won the company swift approval from credit rating agencies.

"They're on the path to being investment-grade, so this is very positive for the company," said one high-yield bond investor. S&P and Moody's downgraded Ashland to junk in mid-2005.

Pricing the bond sale via Citi, BofA Merrill, Deutsche Bank, Scotia and PNC joint books, the company took out secured debt consisting of a US$1.032bn term loan B and a US$1.406bn term loan A.

A draw on its new US$1.2bn senior unsecured revolver will be used to repay the remaining US$200m of the term loan A.

With no secured loans left outstanding, the security on the existing senior secured notes will also fall away, leaving the company with very little secured debt and putting the senior unsecured debt at the top of its capital structure.

As a result, Moody's upgraded the rating on the senior unsecured note to Ba1 from Ba2, and confirmed Ashland's corporate family rating at Ba1. S&P raised the senior unsecured debt to BB from BB- and affirmed the corporate credit rating at BB.

Ashland, which is focused on achieving its leverage target of 2.0x, is currently leveraged at 4.2x, according to Moody's.

The agency expects Ashland will apply free cashflow towards debt reduction going forward, and will limit the size of near-term acquisitions to reduce that leverage.

GOOD RESULT

Ashland began marketing the US$2.3bn senior notes on Wednesday morning, with the deal split among three-year, five-year, 9.5-year (in the form of an add-on to its 4.75% due 2022) and 12-year bullet tranches.

Initial price thoughts were 3% for the three-year, 4% for five-year, 5% for the 9.5-year add-on (for a dollar price of 98.125) and 5.25%-5.375% for the 12-year tranche.

The 12-year was then changed to a very investment grade-like 30-year maturity with initial price thoughts of 7%.

Guidance came out at slightly tighter levels on most tranches: 3% area on the three-year, 3.875%-4% on the five-year, 4.875%-5% on the 9.5-year 4.75% add-on, and 6.875%-7% on the 30-year.

On Thursday morning, the three-year tranche, at US$300m, was launched and priced at 3% at par. The US$700m five-year piece priced at 3.875% at par. The US$650m add-on to the 4.75% notes due 2022 priced at 99.059 to yield 4.875%, while the US$350m 30-year piece priced at 6.875% at par.

The three longer tranches priced on the tight end of talk.

While the deal was viewed as a strong positive for the company, pricing was perceived as too tight for some high-yield investors.

But it was attractive for investment-grade buyers, who were heard to account for roughly 35% of the US$7bn order book.

The 30-year tranche was also viewed as investment-grade in style. The majority of demand on that piece came from high-grade buyers, it was heard, while high-yield investors gravitated to the lower duration bonds.

Demand was strong. For the US$650m add-on, for example, one investor heard orders had reached US$3-US$4bn.

But secondary performance was muted, with all tranches seen trading flat to up half a point after the deal priced - fully understandable from a high-yield perspective.

"I think the market has seen enough of this low-yielding stuff," the high-yield investor said.

"Nowadays people seem to be more attracted to a company that is having difficulties but offering yield, than a solid Double B rated company at these tight levels."

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