February 25, 2014 / 7:35 PM / in 4 years

UPDATE 1-PepsiCo launches USD2bn two-part bond

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 corporate debt.

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 1%.”

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 this year.

“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.”

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