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 Barclays.
The company launched the two-tranche bond at the tight end of guidance, reflecting solid demand for the five-year fixed and floating-rate transaction.
“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 USD112.00.
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 price talk.
With the launch at 102bp, that would indicate a negative new issue concession.
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.