Nestle glides to record tight spread and coupon

Abstract

Nestle performed the latest step in its acquisition financing dance with a deft EUR 850m 10 year bond that came at an extremely fine spread over mid-swaps, yet left investors wanting more. The Swiss foods group's $11.85bn agreed bid for Pfizer's baby food arm has led to a light flurry of bond issues since it was announced in April, but the company has kept investors - and its own banks - guessing as to how much debt it will raise and from what sources.

Nestle performed the latest step in its acquisition financing dance on Monday, with a deft EUR 850m 10 year bond that came at an extremely fine spread over mid-swaps, yet left investors wanting more.

With a book of about [Euro] 2.4bn from 243 investors, Bank of America Merrill Lynch, BNP Paribas, HSBC and Royal Bank of Scotland priced the deal for the Aa2/AA rated issuer that has been called "pretty much the best credit in corporate Europe" at 15bp over mid-swaps. Bankers away from the deal said that was a new issue premium of 5bp or less.

The Swiss foods group's $11.85bn agreed bid for Pfizer's baby food arm has led to a light flurry of bond issues since it was announced in April, but the company has kept investors -- and its own banks -- guessing as to how much debt it will raise and from what sources. Monday's deal was mandated only late on Friday.

"They're being very intelligent in the way they're approaching the market," said a banker away from today's issue. "The Novartis and Roche [acquisition finance] deals came at much more difficult times, but they paid hundreds of basis points of new issue premium. Jumbo trades like those are exciting but they may not make economic sense."

In February and March 2009 Roche raised $39.6bn of bonds to finance its $47bn hostile acquisition of Genentech, with spectacular multi-tranche issues in dollars, euros, sterling and Swiss francs. A year later Novartis sold a blockbuster $5bn deal as part of its $28bn takeover of a 52% stake in Alcon from Nestle.

"It's taken Roche and Novartis two or three years to get their [spread] levels back to where they were," said the banker. "By doing its financing piecemeal, Nestle is managing to do a $12bn acquisition financing and preserve its tight levels."

After announcing its takeover plans in April, Nestle held fire until mid-June, with not even a loan syndication to back the deal. Then this rare borrower turned to one of its favourite markets, the little-used Eurodollar sector, for a five year issue sold heavily to Swiss investors that grew from $300m to $900m.

Norwegian krone and Australian dollar issues followed, before a [Euro] 500m seven year in mid-July -- Nestle's first deal in the currency for six years. From guidance of 30bp area over mid-swaps, JP Morgan, Mitsubishi UFJ Securities, Santander and Societe Generale squeezed the [Euro] 6bn of orders into a deal with a 15bp spread -- a level only state-linked companies had ever achieved at seven years or longer. The 1.5% coupon was one of the lowest on any seven year bond in euros.

By then, Nestle had also sauntered into the loan market, picking up a 364 day bridge loan that found a 100% hit rate from lenders, despite its 20bp margin and 1bp commitment fee, and was increased from $7.4bn to $8.5bn.

Going one better

For this week's 10 year bond, BAML, BNPP, HSBC and RBS set price guidance at 20bp area over mid-swaps, but the tightening to 15bp -- the same spread as Nestle's seven year less than two months ago -- surprised no one.

"It's not an absolute blowout -- perhaps some investors are a bit more wary than a few months ago when deals were being 10 times oversubscribed," said another banker away from the deal. "But it remains remarkable -- it shows that the quality of the issuer is driving investors to come in, despite the very tight level."

Nestle's coupon of 1.75% set a new record low for corporates in 10 year euros.

A banker at one of the leads said: "It was a great trade. The big question was, would it be as successful as the shorter dated bonds Nestle had done in the past. The answer was Nestle set a new benchmark with the lowest ever coupon -- continuing the clear trend that began with Procter & Gamble's 2% in August."

Nestle had priced 30bp inside France, the banker said, and no more than 10bp outside KfW.

"Ten years was a natural step to complete their curve," he added. "Right now there is a perfect alignment of stars. General spreads are very close to their tightest levels of 2006 and 2007 and yields are their lowest ever.

Though Nestle could easily have raised [Euro] 1bn, its leads had to wrangle to get it to increase the deal from [Euro] 750m to [Euro] 850m, partly to ease investors' disappointment over allocations.

The book was just right for the deal, the banker said, big enough but not too big. Some insurers, especially French ones, found it too dear, and it was too long for much German retail interest, but pension funds were keen buyers, and there were some orders from government bond funds.

The deal tightened 4bp on the break but was 1bp or 2bp wider than re-offer by Thursday, as many of the tightest priced deals suffer due to the glut of deals.

German investors bought 25%, UK 22%, France 19%, Switzerland 13%, Netherlands 11%, other EMEA 7% and others 3%. Asset managers took 63%, banks 13%, pension funds 11%, insurance companies 8% and others 5%.