The Long and Short
WY restructures debt as Fed liftoff approaches
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.
Weyehaeuser (WY: Baa2/BBB) is among the latest issuers to bring a new debt deal in conjunction with a tender offer to redeem higher cost and expiring debt in the company’s capital structure. It is a little curious that management had not done so previously, with a long runway of low rates and accommodative debt markets in the years preceding the announcement. Given some of the extraordinarily high coupon debt being targeted in the tender offer one would have expected management to address it earlier, though WY has not tapped the public debt market since 2020. As Fed liftoff approaches, there has been a late push from investment grade issuers seeking to term-out debt maturity schedules and target inefficient issues within their respective capital structures.
With escalating geopolitical tensions in the Ukraine, eventually leading up to the Russian invasion in the early hours of Thursday morning, it was a tricky week for debt issuers seeking to tap the public USD debt market. WY successfully brought a two-part $900 million debt launch consisting of an 11-year note and a 30-year note, which respectively became the longest two maturities in the capital structure. On the day following the launch, those deals were being quoted as much as 15 bp wide of their launch levels of +145 and +180, respectively, reflecting the sharp move in risk markets following the invasion. We see this as particularly advantageous for any investors who may not have participated in the new launch and are still contemplating whether to engage in the debt tender offer, as it provides potentially attractive options for the use of proceeds.
Investors have until March 8th to receive full consideration for the WY debt issues included in the tender. It expires on March 22nd, but any investor that tenders after the early payment date will have a $50 early tender premium deducted from their total consideration per $1,000 of principal amount of notes. Below we provide a breakdown of the tender offer waterfall, which will max out at $1 billion in the order of acceptance priority presented below. We include estimated levels of premium (on spread and dollar price basis) over the bonds’ market pricing immediately prior to the tender announcement.
Exhibit 1. Weyerhaeuser Tender Offer
Source: Company Press Release, Amherst Pierpont, Bloomberg/TRACE indications
The WY 7.85% ‘26s and WY 7.375% ‘32s appear to have some of the most attractive premiums among the higher priorities in the current tender offer. We suspect many of the holders of the highest coupon issues in the front-end of the curve (2025 maturities for example) will likely be inclined to hold the debt to maturity. The bottom two tranches of the tender priority waterfall include the more recently issued debt (10-year debt at the time of launch in 2019 and 2020) which would provide fairly simple/logical swaps into the new 11-year debt, should the holders of the high coupon debt balk at the prospect of receiving the listed tender premiums.
The WY credit has been benefitting from an extended period of favorable operating conditions, highlighted by higher global prices for lumber and oriented strand board. Heightened operating cash flows have resulted in much lower leverage over the past two years. Management also revised its dividend policy to help bolster available cash flow. While classification as a REIT requires WY to pay out 90% of their ordinary taxable income, beginning in 2020 WY reduced the fixed rate portion of their dividend payout, providing more flexibility if and when market conditions soften. WY is one of the world’s largest owners of timberland properties and among North America’s largest producers of wood products.
Exhibit 2. WY Debt Curve following new issues
Source: Bloomberg/TRACE – G-spread indications as of 02/24/22
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