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Anheuser-Busch uses debt to fund a tender offer
admin | January 11, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Anheuser-Busch Inbev announced a 6-tranche, $15.5 billion debt deal and concurrently launched a $16.5 billion tender offer. The most compelling trade opportunity is to tender the 3.65% 2026 bonds and extend into the new 2029 bonds, picking up 50 bp.
New debt funds tender offer
Anheuser-Busch Inbev (ABIBB) tapped the market this week in an effort to refinance debt from its acquisition of SAB Miller back in 2016. ABIBB initially announced a $10 billion deal across six tranches: 6-, 10-, 12-, 20-, 30- and 40-year at attractive levels. However, the deal was upsized to $15.5 billion with the 10-year and 30-year tranches receiving the most interest. Concurrently with the deal announcement, ABIBB launched a tender offer for $11 billion of debt. Shortly after the launch of the upsized bond deal, ABIBB increased the tender offer to $16.5 billion.
Debt Reduction Remains a Slow Process
The new deal/tender offer only provides for $1 billion of debt reduction, following $2.5 billion of debt reduction in November. This hardly moves the needle with respect to ABIBB’s total debt load and high leverage metric. Estimates are that ABIBB will end fiscal 2018 with total leverage of roughly 5.0x (the company reports fiscal year end results on 2/28/19). Even with a dividend cut of 50% to free up funds for debt reduction, debt reduction has been muted. As such, Moody’s downgraded ABIBB’s rating to Baa1 back in December as the rating agency now believes the company will not achieve 4.0x leverage until year end 2020. S&P kept the A- rating and revised its outlook to negative as they felt the dividend cut was a slight positive for the rating. However, S&P stated that to keep the A- rating, ABIBB would need to reduce leverage to 4.0x by year-end 2019. In order to hit a 4.0x leverage target based on S&P’s adjustments, ABIBB would need to reduce debt by roughly $20 billion from current levels.
Tender Levels Not Very Compelling
Given that ABIBB is in a position where it needs to reduce debt, tender levels were not all that attractive, particularly in the front end bonds. With higher Treasury prices since the last tender offer in November, ABIBB used that as an opportunity to tender at spread levels that were wider than the last tender offer. On the last offer, ABIBB tendered for the 2.65% 2/1/21 bonds at spread of +40 bp and the 2.625% 1/17/23 and the 3.3% 2/1/23 bonds at a spread of +87.5 bp. This offer, ABIBB is looking to tender at +50 bp and +105 bp respectively. Furthermore, given that the new deal does not include any tenors less than the 6-year, holders of the shorter dated bonds that are being tendered have no new ABIBB bonds to essentially move into.
Relative Value
The most compelling trade opportunity with the new deal/tender offer is to tender the 3.65% 2026 bonds and extend into the new 2029 bonds. That curve priced at +65 bp and has tightened in the greys to roughly 50 bp. The pick-up of roughly 50 bp currently to extend just under 3 years is attractive given that the curve is currently much flatter and worth approximately +15 bp.
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