United Technologies Brings Mega 6-Part Deal To US Bond Market

Date : 05/24/2012 @ 10:13AM
Source : Dow Jones News
Stock : United Technologies Corp. (UTX)
Quote : 128.33  -0.92 (-0.71%) @ 7:33PM
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United Technologies Brings Mega 6-Part Deal To US Bond Market

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United Technologies Corp. (UTX) has hit the U.S. bond market with a six-part benchmark deal to help it finance its $16.5 billion takeover of Goodrich Corp. (GR).

A deal size hasn't been determined, but Fitch Ratings notes the company plans to issue between $9 billion and $11 billion of debt to help fund the acquisition, which is expected to occur in mid-2012. "Benchmark" typically means at least $500 million per tranche, suggesting a minimum size should be $3 billion.

The Hartford, Conn., company builds aircraft engines, helicopters, elevators, and other industrial systems.

The deal consists of 18-month and three-year floating-rate notes, plus fixed maturities in three-, five-, 10-, and 30-years.

An investor familiar with the long-awaited issue said $3 billion is expected on the floating-rate tranches alone. The investor also said the fixed maturities may offer spreads over Treasurys of 1.0 percentage point, 1.2 points, 1.5 points, and 1.9 points, respectively.

Syndicate managers have said at least two mega-size deals were supposed to come to market earlier this month, but they were postponed because of weakened sentiment owing to the flare-up of the European debt crisis and J.P. Morgan Chase & Co.'s (JPM) $2 billion trading blunder.

Markit's CDX North American Investment Grade index, a proxy for risk in the corporate bond market, has improved in each of the last three trading sessions, making the climate a little better to get deals done.

The CDX index finished last week at its worst level of 2012, at 124 basis points, but has since improved to less than 119 basis points. The index tracks the cost of protecting against corporate bond defaults, so a lower figure shows improvement.

Moreover, yields remain low despite jumping 0.14 percentage point in recent weeks. The Barclays U.S. corporate investment grade index closed Wednesday at 3.39%, versus the 10-year average of 5.16%.

McDonald's Corp. (MCD), the lone issuer in Wednesday's market, was even able to sell seven-year bonds with a record-matching low coupon of 1.875%.

Jesse Fogarty, portfolio manager at Cutwater Asset Management, said he plans to buy the United Technologies bonds at various maturities. "While we have been de-risking our portfolios and selling credit risk over the past two months, positioning for wider spreads, we are very comfortable with the credit profile and view this as a terrific opportunity to enter the name."

He said the 30-year bonds in particular are likely to offer good value, based on the steepness of the yield curve, which shows where long-dated yields are relative to shorter-dated bonds.

The United Technologies deal carries provisional ratings of A2 from Moody's Investors Service and an equivalent A rating from Standard & Poor's and Fitch.

The notes contain a mandatory redemption provision if the acquisition is not completed by March 25, 2013.

S&P said its rating incorporates the pending acquisition of Goodrich, which will strengthen the company's business risk profile.

"This should be enough to offset its less conservative financial policies and temper the deterioration in financial leverage that will result from the transaction," the ratings firm said.

According to S&P, United Technologies should have a ratio of debt to Ebitda--earnings before interest, taxes, depreciation, and amortization--of 2.7 times upon completion of the acquisition, based on projections. The ratings firm expects the leverage ratio to fall toward 2 times "within the next two years" from cash-flow generation and the sale of assets.

The deal is being run by Bank of America Merrill Lynch, HSBC, J.P. Morgan, BNP Paribas, Citigroup, Deutsche Bank, Goldman Sachs, and Royal Bank of Scotland.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382; patrick.mcgee@dowjones.com

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