Jan 9 (IFR) - Hewlett-Packard appeared to be getting
strong demand Thursday for its first bond offering in almost two
years, in another sign of the market's belief in the turnaround
plan at the US computer giant.
The USD2bn bond deal will put a dent in the USD5.5bn of debt
that Hewlett-Packard has coming due this year at a time when CEO
Meg Whitman's turnaround plan has helped restore stability and
the decline in the PC market is expected to slow.
HP has made significant improvements in its credit
fundamentals, including a decline in its net operating debt to
zero in the past year - helping to restore investor confidence.
"We think HPQ still faces a difficult turnaround, but
challenges, including PC market dynamics, appear to be easing
and should reduce tail risk of a break-up or significant M&A,"
said Danish Agboatwala, senior TMT credit strategist at
The company launched the two-tranche bond at the tight end
of guidance, reflecting solid demand for the five-year fixed and
"People are so geared up for this deal that I have no doubt
there will be a food fight to get allocations," said a credit
strategist not involved in the trade.
The USD1.25bn fixed piece launched at 102 basis points over
Treasuries, while the USD750m floater was launched at 3mL+94bp.
Bank of America Merrill Lynch, BNP Paribas, Royal Bank of
Scotland and Wells Fargo are the lead managers on the deal,
which was first marketed at initial price thoughts of 115-120bp
earlier in the day.
Guidance tightened from there to T+105 area (+/-3bp).
HP shares were trading at USD27.76 around midday on
Thursday, up from roughly USD21 just three months ago. Its
spreads have already tightened dramatically, with some syndicate
bankers having seen its 10-year notes in the mid-200s about
three months ago.
THE NO-CONCESSION CONCESSION
To draw in investors to the trade, which is expected to
price later in the day, the company started out offering
generous new issue concessions.
A relevant comparable was HP's own 5.5% March 2018s, trading
at Treasuries plus 75bp or G+113bp and a high dollar price of
One banker away from the deal suggested taking off around
10bp for the high dollar price to bring the G spread on the 18s
to around 103bp.
Although some credit curve difference might have to be added
back in to that spread, that would suggest a new issue
concession that looks like 10bp at the 115-120bp whisper level
but actually amounts to nothing at all at the guidance level,
the banker said.
Another pricing benchmark is HP's 4.05% September 2022s at
Treasuries plus 115bp or G+139bp, which suggests fair value on a
new 10-year would be around 140-145bp, he said.
HP has a steep credit curve of about 40bp between five and
10 years, putting fair value on a new five-year at around
100-105bp, which would suggest a new issue concession at the
initial price thoughts level of around 10-15bp, according to the
banker - and again basically nothing at the T+105bp official
With the launch at 102bp, that would indicate a negative new
Not all analysts agree, of course. Morningstar puts fair
value on a new HP five-year fixed-rate note at well under 100bp,
making the deal an attractive buy.
"We believe HP should trade in line with a BBB+ portion of
the Morningstar Industrials Index, which currently stands at
125bp, with an average of about 10 years to maturity," a
Morningstar credit strategist wrote.
"On this basis we would place fair value on the new
five-year at about 85-90bp."
HP is rated Baa1/BBB+/A- by Moody's, S&P and Fitch. It was
last in the bond market in March 2012, when it issued
USD500m 4.05% 2022s and USD1.5bn 2.6% 2017s.