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Carrier Global inaugural bond deal sees heavy demand
admin | February 14, 2020
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.
Carrier Global, which is being spun from its parent United Technologies Corp. (UTX), recently tapped the market with its inaugural bond deal. Attractive initial price talk (IPT), index-eligible tranches and a new credit providing for name diversification led to a deal that was 4.5x oversubscribed. Carrier’s bonds tightened another 5-7 bp after the launch, pushing fair value relative to peers.
The company launched a $9.25 billion offering across six tranches, with proceeds to be used to pay a dividend to UTX. The deal will be rated Baa3/BBB. Right after the deal was announced, UTX commenced a tender/consent solicitation for 9 series of notes. The tender is broken up in two parts with an any and all tender for up to $7.6 billion of debt across seven series of notes and a partial tender for up to $2.0 billion across two series of notes (with principal outstanding of $3.4 billion).
All tranches were launched +20 bp through IPT with the exception of the 3-year tranche, which was launched even tighter at +25 bp through IPT. Carrier bonds tightened roughly 5-7 bp post launch as allocations were harsh given the book size. That said, trading levels appear pretty full relative to peers Ingersoll Rand (IR- Baa2/BBB) and Johnson Controls (JCI – Baa2/BBB+/BBB). Carrier’s 2050 notes are trading 10 bp behind IR’s 2049 notes and nearly 12 bp through JCI’s 2047 notes. While there is a bit of a technical in the 30-year part of the curve, currently being driven by demand out of Asia, fair value for Carrier’s debt is roughly 10-15 bp behind IR debt.
Exhibit 1. Carrier/IR/JCI spread comparison
Source: Company reports, Amherst Pierpont Securities
Leverage Elevated But Expected to Decline
Carrier’s leverage post spin is expected to be in the 3.5x-4.0x range. The rating agencies calculate leverage a bit differently, which accounts for the difference in ratings and leverage between the raters. This is high compared to the aforementioned peers, with IR’s leverage at roughly 2.1x and JCI’s a bit higher at 2.9x. S&P calculates leverage post spin to be roughly 3.5x and expects debt levels to decline in the $500-to-$600 million range annually in 2020 and 2021. S&P believes the company will look to make prepayments on its proposed 3-year term loan, and estimates leverage can fall to the 2.3x-2.8x area by year-end 2021. Moody’s calculates $12.5 billion of total debt post spin (which includes their debt adjustments) putting Carrier’s leverage at roughly 4.0x. Moody’s notes that 4.0x leverage is high for the current Baa3 rating, and expects leverage to decline to the low 3.0x over the next two years. Moody’s has noted that it is important for the current Baa3 rating that the company utilizes free cash flow proceeds for debt reduction, as they anticipate slow earnings growth over the next two years. The agency has forecast Carrier’s free cash flow to be in the $700-to-$800 million range annually for the next several years.
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