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!