Tag Archives: Debt deal underwriting shelf takedown red herring prospectus note deal New Merck December 7 2010

Bloomberg Sees Debt Pricing Spreads As Much-Tighter Than The Reality I’ve Foreseen


Bloomberg just ran a story suggesting that — because a Merck note issued back in June 2009 (see archived image of the tranches in the 2009 deal, at right), due in June 2015 last traded (in the aftermarket) on December 2, 2010 at a yield of 1.85 percent, or 27 basis points over five year Treasuries at the time — maybe today’s likely $2.5 billion dual-tranche offering will get done at around 1.85 percent on the 2015 portion.

I think that assumes way too much. Spreads aren’t likely to be that tight — especially on the ten year portion. One — Treasury yield-rates were slightly lower last week. Two — the “27 bips over Treasuries” mile-marker is prior to the issuance of an additional (likely) $2.5 billion in unsecured Merck debt, today. That changes a lot of things, here.

Clearly, what Merck is doing here is laying in some low coupon debt, prior to any news on the J&J arbitration outcome — up or down. One must factor that overhang in.

The most recent comparator I’ve seen, on a corporate (though rated as A2, not A1), would be Hewlett-Packard — of last week — and yep, that was at 75 bips over Treasuries on the five year. That rating difference shows its spread in the longer maturities (take a look at the ten year on HP, below, at 95 bips over).

Proof? See this, per the Wall Street Journal, on December 2, 2010:

. . . .Hewlett-Packard Co. — $2 billion multitranche bond issue was priced Monday, according to people following the sale. Bank of America Merrill Lynch, BNP Paribas SA, UBS AG and Wells Fargo Securities managed the deal, proceeds from which are targeted for general corporate use. Spokespersons for the issuer declined to comment on the transaction. Formal price guidance early Monday had been in the area of 75 basis points over comparable Treasurys for the five-year deal and 95 basis points over comparable Treasurys for the 10-year deal. Terms: Tranche 1: Amount: $650 million; maturity: Dec. 1, 2015; coupon: 2.20%; price: 99.911; yield: 2.219%; spread: 73 basis points more than Treasurys. Tranche 2: Amount: $1.35 billion; maturity: Dec. 1, 2020; coupon: 3.75%; price: 99.827; yield: 3.771%; spread: 95 basis points more than Treasurys. Common terms: Settlement: Dec. 2, 2010; ratings: A2 (Moody’s). . . .

I can almost guarantee that CFO Kellog saw this HP deal last week, and knew that he could get something around 75 bips — on both the five’s and ten’s — and took some risk (i.e., the J&J arbitration outcome — a potential $10 billion event, over the next three years — which would be only downside, and would widen Merck spreads significantly) off the table, this morning.

Will he get 75 bips over — or will the spreads widen, as the day wears on? We’ll see. This is great sport!

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Merck Has a “Red Herring” Debt Shelf Takedown Offer “On The Street” This Morning


UPDATED — Still no aggregate size indication, but B of A (using the Merrill Lynch imprint) and J.P. Morgan are leading the underwriting syndicate, as joint book-runners.

Heh! Note: No Goldman, Sachs & Co.; no Morgan Stanley. No shock, that — after Goldman suggested buying puts on Merck common stock, at a strike price of $35, about two months ago, and that was after downgrading Merck to “neutral“, in May of 2010.

Now, the glaring ommission of Morgan Stanley, on the other hand — is a more complicated story. Morgan Satanley, you see, is overseeing the Merial divestitures, according to published reports. As such, it will make massive fees; so Merck need not spread any more paper to the house, to keep it in “good graces“. Yes, gentle readers, this is — despite the endless stream of “Lady MacBeth-esque” protestations to the contrary from Wall Street — exactly how these deals work.

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MY “WOLRDWIDE EXCLUSIVE” PREDICTION | 10:18 AM EST

With five year Treasuries yielding 1.60 percent and 10 year Treasuries yielding 3.04 percent this morning, Merck could price these at around 75 basis points over that — or around 2.4 percent on the five year; and 3.8 percent on the ten year Merck paper. Let’s see where they actually land, shall we?

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Quoted below in blue is a bit of the “Risk Factors” section — from the just-SEC-filed 424(b) so-called “red herring” shelf takedown debt prospectus. A red herring prospectus is used to solicit interest in the securities, while the underwriters make book, on the interest rate(s) needed to sell the entire offering. It is used as a stalking horse in the bdding process.

This deal may be priced and finalized yet this afternoon, as it has been rated A1, stable by Moody’s. If that happens, Merck will have the cash by Friday, under the standard three day settlement rules.

Here is a salient bit from the “red herring” filed this morning:

. . . .The notes are not guaranteed by any of our subsidiaries and therefore the notes will be structurally subordinated to all existing and future secured and unsecured indebtedness and other liabilities of our subsidiaries. The indebtedness of our subsidiaries totaled $8.7 billion as of September 30, 2010. In addition, as of September 30, 2010, certain of our subsidiaries also guaranteed $7.8 billion of our existing indebtedness ($0.7 billion of which matured on October 1, 2010). Our obligations under the notes will be structurally subordinated to guarantees by our subsidiaries of our indebtedness. We also guarantee indebtedness of our subsidiary Merck Sharp & Dohme Corp. (“Old Merck”), including $8.5 billion aggregate principal amount of its outstanding debt securities. Therefore the notes will be structurally subordinated to Old Merck’s obligations with respect to those debt securities, and our guarantee of those debt securities will rank pari passu with the notes. The terms of the notes and the indenture do not preclude our subsidiaries from incurring debt or other liabilities or providing guarantees that will be structurally senior to the notes. . . .

We’ll let you know when it is priced. The interest rate(s) paid by Merck are likely to be very low — based on the historic lows in comparable Treasuries, plus a spread to reflect Merck’s slightly worse credit rating than the US government. BofA and J.P. Morgan reciprocal back-scratching, courtesy of Whitehouse Station, is now in full-effect.