The Long and Short
Walmart’s inaugural green bond part of capital structure optimization
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.
Walmart Inc. (WMT) was in the market recently with a five-tranche debt offering, totaling $7 billion in volume. The deal included the company’s first ESG issuance, as they issued a $2 billion 10-year green bond, marking the largest green issuance from a U.S. corporation. Concurrent with the debt offering, WMT announced a waterfall tender offer for up to $8 billion of debt. While the tender offer included 25 series of notes, the company’s highest coupon debt were the first priorities. With rates close to the lows and demand for corporate paper not abating, WMT will be able to further optimize its capital structure and reduce overall interest costs.
Exhibit 1. WMT Debt Issuance (9/08/2021)
Source: Bloomberg TRACE; Amherst Pierpont Securities
WMT saw good demand for the deal as it was roughly 4x oversubscribed, enabling them to bring $2 billion more than the $5 billion that was anticipated. All but one of the tranches priced with some concession to existing bonds, providing for some upside. Based on the pricing for each tranche as noted in Exhibit 1, the green tranche priced with the most concession. While green bonds tend to trade behind non-ESG eligible issuance, 18 bp is a nice pick up in the 10-year part of the curve to move into a green bond while taking out over 6 points of premium. All traches are performing well and are currently offered roughly 5 bp thru issue level.
Tender Offer Announced
Proceeds from the aforementioned debt issuance, excluding the green bond proceeds, will be used to fund a tender offer for up to $8 billion of debt. According to the company, the green proceeds will be used in one or more of the following eligible categories: renewable energy; high performance buildings; sustainable transport; zero waste; water stewardship; and habitat restoration/conservation. The company’s waterfall tender offer is prioritizing high coupon bonds which have been targeted in previous tenders as the coupons range in the 4%-7.55% range. The principal amount outstanding for the 25 series of notes announced in the tender totals $28.5 billion. While the tender offer expires on 10/5/2021, the early tender deadline is set for 9/21/2021 at 5pm NYC time. We note that it behooves investors to participate by the early tender deadline as the fixed tender spreads include a $50 per $1,000 notional early tender premium, as this is more than the standard $30 early tender premium. Those who participate after the early tender deadline would need to deduct 5 points from the dollar price calculation.
Exhibit 2. WMT Tender Offer
Source: WMT Press Release; APS
Recent Results Were Strong – Guidance Raised
WMT reported strong 2Q results (both in store and online) as U.S. comp sales (ex-fuel) were up 5.2%. This came in ahead of street estimates of 3.5%. Additionally, eCommerce sales remain on track to hit management’s $75 billion target by year-end. WMT’s adjusted operating margin increased 50 bp year-over-year (to 5.2%). Growth was largely fueled by strong underlying business trends due to the rebound in the U.S. economy and stimulus spending. Comp sales increased each month in the quarter, with July being the strongest month in the second quarter. Management noted that they effectively grew market share in the grocery business as comp transactions were up 6.1% year-over-year. Grocery benefitted from a shift back to in person shopping. Grocery sales also accelerated throughout the quarter due to modest ticket inflation and better inventory management with a greater percentage of in-stock items.
Guidance was increased for a second time this year with management now expecting consolidated net sales to be slightly positive (ex fx) versus previous expectations for a decline in the low single digits. U.S. comp sales (ex-fuel) are now expected to be in the 5%-6% range, up from an increase in the low single digit range. Consolidated operating income should also be up in the 9%-11.5% range (ex fx), which is up from previous guidance of an increase in the mid-single digit range. WMT’s strong balance sheet continues to improve as the company ended the quarter with close to $23 billion of cash on hand, up from $17 billion in the year ago-period. Additionally, total debt has declined by approximately $9 billion over the same time period. We estimate that lease-adjusted leverage now stands at 1.6x, which is down a half turn from the year-ago period. WMT repurchased $5.2 billion of shares year-to-date, which represents about 25% of its $20 billion authorization. With a strong balance sheet underscored by a large cash balance, we expect management to be focused on directing free cash flow to shareholder remuneration. However, we do note that this new deal and tender offer provide for some additional modest delivering.
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