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Corning steps in to satisfy duration demand

| November 15, 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.

Corning Inc (GLW) tapped the market this week for $1.5 billion across 30-year and 60-year tranches. The long dated issuance is not foreign to the glass manufacturer as it issued $850 million across 30-year and 50-year tranches at the same time last year. The difference with this year’s issuance was the sizeable curve, which at +145 bp seems steep for a high BBB credit relative to peers.

Last year, GLW priced its 30- and 50-year tranches +50 bp apart (+2.5 bp per year for 20 years). Over the course of the year, the 30-year tranche outperformed the 50-year tranche, leading to a spread differential of nearly +110 bp at the time of the new deal (+5.5 bp per year). This week’s issuance was talked with a +167.5 bp curve and launched with a +155 bp curve between the 30- and 60-year tranches (+5.17 bp per year), at +160 bp and +315 bp, respectively.

Exhibit 1: GLW 30-year versus 50-year spread performance

Source: Bloomberg

New bonds still look attractive

With the sizeable curve and pricing concession to existing bonds, investors piled into the 60-year tranche. As such, GLW priced nearly three times more 60-year bonds ($1.1 billion) versus 30-year bonds ($400 million). Post launch, demand was still evident for the 60-year tranche as bids were 10 bp tighter. The 30-year tranche lagged and ended the day flat to issue level spread.  That said, the curve between the 30- and 60-year tranche is now +145 bp.

With so much focus on the 60-year tranche, it appears that the new 30-year tranche has been overlooked.  While the existing 30-year (5.35% 11/15/48) sold off at the end of the day and was trading at roughly +162 bp or 2 bp wide to the new 30-year (3.9% 11/15/49), the new 30-year has at least 10 to 15 bp of upside relative to the existing 30-years given the high premium associated with those bonds (roughly $124 area). Any tightening in the 30-year tranche would support tightening in the 60-year tranche.

Furthermore, the argument can be made that the GLW curve stands to tighten.  At +145 bp, or +4.83 bp per year for 30 years for a high BBB credit seems steep. Similarly rated long dated index eligible rail curves are much flatter.  For example, KSU (Baa2/BBB) 30- to 50-year curve is worth roughly +45 bp, while CSX (Baa1/BBB+) and UNP (Baa1/A-) are closer to +50 bp.  An additional highlight is FDX’s (Baa2 (n)/BBB) 30- to 50-year curve which is roughly +85 bp and its 50-year bond is not index eligible. FDX is currently working through higher leverage since it acquired TNT and has not been a consistent generator of free cash flow. On a LTM basis, FDX burned through roughly $278 million of cash. Consensus estimates have FDX burning approximately $253 million of cash for fiscal 2020.

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