By Shankar Ramakrishnan
NEW YORK, Feb 25 (IFR) - PepsiCo Inc made a huge splash in
the US high-grade market on Tuesday, offering USD2bn of
three-year and 10-year bonds to an investor base keen on fresh
The bonds, which will fund repayment of commercial paper as
well as general corporate purposes, were announced with initial
price thoughts that carried a few basis points in new issue
concession to entice orders.
That strategy worked, as the food and beverage giant amassed
more than USD4bn in orders even before the bookrunners came up
with price guidance.
Rated A1/A-/A, the bonds were announced as a three-part
trade that comprised issuance of three-year fixed and floating
and 10-year fixed rate notes.
The three-year fixed had initial price thoughts of
Treasuries plus low 40bp, while the 10-year fixed rate notes
were shown at plus 105bp area.
Pepsico's outstanding 1.25% August 2017s are trading at a
G-spread of 34bp while its 2.75% March 2023s are at G+94bp.
Based on these levels, at IPT stage, the three-year bonds are
probably carrying only a few basis points and the 10-year bonds
had about 11bp in new issue concessions.
"Based on the liquidity of the company's existing debt,
Pepsi's brand recognition, and our AA- issuer credit rating, the
large new issue concession is not warranted; we expect official
price talk will be reduced to near where the existing bonds are
trading," Morningstar said.
As expected, the three-year bonds were shown with a price
guidance of T+35bp area (+/- 5bp) and the 10-year at plus 95bp
area (+/- 3bp), or roughly 5bp-10bp tighter than IPT levels.
As orders started piling up, these levels were further
tightened and the three-year floating rate note was dropped at
the launch stage, when the spread on a USD750m three-year fixed
was fixed at plus 30bp and USD1.25bn 10-year at plus 92bp.
These levels were judged to carry negative new issue
concessions compared with the outstandings. The three-year was
being priced about 4bp inside the outstanding August 2017s while
the 10-year was about 2bp inside the March 2023s.
A Gimme Credit report noted that the carbonated soft drink
category has been declining at a pace of approximately 3% per
year. In the PepsiCo Americas beverage segment, organic revenue
was flat as volume fell 2% in the fourth quarter. For the full
year of 2013, revenue dropped 1% on a volume decrease of 3%.
"We expect a similar trend this year. Unfortunately, growth
in emerging markets is slowing also," the report said.
"We expect total company organic revenue to increase roughly
4% to 5% in 2014. However, the negative impact of foreign
currency changes should slice reported revenue growth to roughly
Free cash flow totaled USD3.4bn in 2013, but it is expected
to decline to about USD3bn this year because of a 15% bump in
the dividend. PepsiCo also intends to repurchase USD5bn of stock
"It is hard to ignore the fact that PepsiCo has tremendous
brand value, a diverse portfolio of products, and excellent cash
generation," Gimme Credit said.
"But given the challenges in the beverage segment, its
aggressive financial policy, and the ongoing event risk, we do
not see much opportunity for spread tightening."