August 4, 2017 / 10:06 AM / 4 months ago

UPDATE 2-BAT to face further scrutiny for jumbo M&A bond sale

(Adds lead bank comments and timing rationale)

By Laura Benitez

LONDON, Aug 4 (IFR) - Investors will try to exert pricing pressure on British American Tobacco next week when it seeks to raise an expected US$25bn-equivalent of bonds in the US and European markets in the middle of corruption probes and tobacco sector turmoil.

BAT has announced two days of investor calls from August 7 for what has been one of the most highly anticipated bond deals of the year, as it aims to fund its US$49bn purchase of Reynolds American.

But investors are weighing up how much of a premium BAT will need to pay following a string of negative headlines over the last week.

The company was slated to issue the bonds at the end of July, sources told IFR, following its results announcement and shareholders meeting.

But its ambitions were thwarted after news that the company and its subsidiaries are being investigated for corruption by Britain’s Serious Fraud Office.

“It’s a shock. I think they’ve lost their bottle and don’t want to wait until September in case more news comes out and their bonds suffer more,” one investor said.

BAT’s bonds had previously been hard hit when the US Food and Drug Administration announced plans last month to reduce nicotine levels in cigarettes and explore measures to move smokers toward e-cigarettes.

Its 3.125% March 2029s widened 10bp on the day the FDA news broke, and a further 4bp on Tuesday when the SFO probe was disclosed.

By comparison, the wider market held steady, with the iBoxx non-financials corporate index bid at 50bp on an asset-swap basis at Thursday’s close, 2bp tighter than at the start of the week.

The timing of BAT’s deal is “almost indecent considering the news we have to digest and the time of the year”, the investor said, adding that he will be on holiday when the deal arrives and has had to brief colleagues.

“We will definitely be out if they squeeze pricing on this. If they do it could go horribly wrong.”

“I’ve done a lot of work on it and made room in the portfolio but we’re not taking any of it unless they pay up,” the investor said.

But a lead banker said the timing has been accounted for and that plenty of notice of the deal’s execution and the two-day investor calls will give the buyside scope to do any necessary credit work.

A banker away from the deal said the timing could actually fall in its favour due to risks of further headlines arising and bonds taking a further hit and threatening to derail the deal.

Last month’s major regulatory shift by the FDA sent the FTSE index of traditional cigarette companies’ shares falling to 65.23 from highs of 71.5 in late July.

BAT, the maker of cigarette brands including Dunhill and Lucky Strike, said in a statement it intended to cooperate with the SFO investigation, but did not provide any more details.

“They need to refinance the bridge loans sooner rather than later so the clock is ticking, and waiting until September could be quite risky,” the same banker said.

Investors expect the tobacco firm to issue around US$25bn-equivalent to refinance loans that were used to fund the acquisition, and a lead banker said the size will be weighted in favour of the US dollar market.

BAT, rated Baa2/BBB+ by Moody’s and S&P, will hold investor calls for a potential multi-tranche US dollar, euro and/or sterling senior unsecured transaction. The euro and/or sterling offerings will be four to 13 years. Tenors for the US dollar-denominated offering will be three to 30 years.

Bank of America Merrill Lynch, Barclays, Citigroup, Deutsche Bank, and HSBC have been mandated for the dollar piece and Deutsche Bank, ING, NatWest Markets, Santander, and Societe Generale for the euros/sterling notes. (Reporting By Laura Benitez, editing by Alex Chambers and Ian Edmondson.)

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