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LOW tender levels leave something to be desired

| 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.

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