LOW tender levels leave something to be desired
admin | October 9, 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.
Following in the footsteps of some of its high-quality peers, Lowe’s Companies (LOW, Baa1/BBB+) announced a $3.5 billion tender offer as it looks to reduce interest costs given the continued low rate environment. Tender announcements have been a running theme for the past few weeks, as high-quality investors see an opportunity to either improve their debt maturity profile and/or reduce overall interest costs given the insatiable investor demand for paper. Demand for the LOW deal enabled the company to price new debt on top of secondaries, although the tender levels are not very attractive. Prior to the announcement, the trading relationship between LOW and its closest peer Home Depot Inc. (HD – A2/A/A) was roughly 32 bp in the 10-year part of the curve. Based on the potential for improvement to coverage metrics if the tender offer is successful, that relationship should collapse closer to 25 bp, with fair value in the new LOW 10-year and 30-year bonds of +85 bp and +125 bp, respectively.
LOW’s waterfall tender for eighteen series of notes, including bonds that were issued earlier this year during the height of the pandemic, highlights just how far spreads have rallied since April. The tender was funded with $4 billion of new issuance, adding some incremental debt unless the tender offer is increased.
Exhibit 1: LOW vs WMT credit profile comparison
Source: Company reports, Amherst Pierpont Securities
Tender Levels Not Very Attractive
LOW is targeting eighteen series of notes with the waterfall tender, with a total principal outstanding of $10.3 billion. Nine of the eighteen series of notes have been tendered before. It is hard to calculate some of the tender premiums given that many of the issues are non-index eligible and have not traded in quite some time. The on-the-run 2030 and 2050 bonds were trading at +92 bp and +150 bp, respectively pre-tender, making the tender offers not all that attractive. For example, LOW’s first priority is being tendered at +175 bp. Although it’s one of the highest coupons being tendered and the bond would likely trade wider given the dollar price, there is a +30 bps differential between that tender offer and the one for the second priority, despite similar coupons and tenors. Arguably LOW may see little participation for that bond relative to the second and third priorities.
Exhibit 2. LOW Waterfall Tender and Spread Premiums
Source: Company reports, Amherst Pierpont Securities
Additionally, for the on-the-run bonds, the tender premiums are minimal. Given that the fixed tender spreads include a $3 early premium benefit, investors will not be receiving any spread compensation by participating in the tender subsequent to the early tender deadline of 5pm NYC time on 10/21/20. To highlight, the tender spread for the 5.125% of 4/15/50 bonds (the fifth priority) is +137 bp. Prior to the tender offer, these bonds were offered at +148 bp, a 7.4% spread premium including the early tender premium. If investors were to tender post the early tender deadline, the $3 early tender premium gets deducted from the dollar price, translating to spread of +149 bp, or 1 bp wider to where they were trading pre-tender. For comparison purposes, Target Corporation’s (TGT – A2/A/A-) lowest tender spread premium was 14.6% on one of the bonds on its most recent tender offer, with the highest being 46%. The average tender spread premium for TGT’s entire ten series of notes was 25.8%. Tender spread premiums below 15% are not as attractive and investors are advised to hold on to their bonds as the tightening of the new on-the-run issues should help to reprice the entire LOW curve tighter, potentially to levels more favorable than the fixed tender spreads.
1 (646) 776-7714
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.