The Long and Short
Bondholders anticipating a make-whole in DuPont split
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.
DuPont de Nemours (DD: Baa1/BBB+*-/BBB+) announced plans last month to split the company into three entities through a tax-free spinoff. The announcement leaves bondholders in a little bit of limbo as management has not been 100% clear about how it will recapitalize the entities. The most likely course is for DD to allow short debt to roll off and fully recapitalize one of the entities, New DuPont, by taking out the existing, longer debt through a combination of make-whole calls and friendly tender offers. However, until the company makes its intentions clear, the situation carries more risk than is currently priced in at current spreads on legacy DD debt.
The company plans to split over the next 18 to 24 months into three pieces consisting of “New DuPont,” Electronics and Water. The only definitive statement was that it intends to capitalize New DuPont as investment grade. Bond spreads have tightened sharply on speculation that in recapitalizing, DD will likely redeem most or all of the existing debt through a make-whole call, or at worst, a series of very bondholder friendly tender offers for the existing debt. There is precedent, as DD’s de-merger from Dow announced back in 2018 was largely carried out in bondholder-friendly fashion. Current spreads on DD debt leave little room for error if management does not behave in a similar fashion.
DD has already launched a partial make-whole call of the 2038 maturity bonds (Exhibit 1). The company will take out $650 million of the $1.65 billion outstanding at the stated make-whole level of 30 bp. This initial course of action lends credence to the likelihood that management is going to execute this recapitalization in a relatively orderly and bondholder-friendly fashion, but it also demonstrates that they might not do so in one corporate action, so still a lot remains unclear.
Exhibit 1: DD bonds trade tight to the investment grade chemical segment
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications only
New DupPont would retain approximately $6.6 billion of annual net sales (Exhibit 2), while Electronics would be about $4 billion and Water would account for about $1.5 billion of existing net sales. All three rating agencies commented on the break-up plans, but only Fitch specifically indicated that they expect the bonds to be taken out through a make-whole call, while the others remain more skeptical. S&P placed the BBB+ rating on watch negative, reflecting the proposed loss of business diversity of the transactions, and awaits more clarity on the recapitalization plans. Moody’s revised the outlook to negative from stable, stating that a downgrade would be highly likely with the separation of the businesses, and likewise is seeking more details on how the new balance sheets will be structured.
Exhibit 2. DD current bond valuations versus make-whole call
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
The consensus view appears to be that the DD 2025 debt will simply be allowed to roll-off at its stated maturity, as it predates the projected date of completion for the spin-offs. Those who think that a make-whole is more probable for the remaining debt would likely point to DD’s past history of bondholder friendly actions during the Dow/DD de-merger, during which the current bonds were issued and the previous existing debt was taken out in friendly fashion. Currently, however, it is somewhat unclear that all the existing DD debt would need to be taken out, if management chooses to keep some of the existing issues outstanding as part of its new, projected-to-be investment grade capital structure. A partial tender for some or all of the longer-dated debt appears a possible strategy. The good news for bondholders is that market pressures on spreads, have squeezed the range of outcomes for a tender offer versus a traditional make-whole (Exhibit 3). When considering the likely premiums necessary to execute versus current market valuations, there is a limited difference between where DD management could reasonably take out debt voluntarily versus where they would be required to do so through a make-whole.
Exhibit 3. DuPont plans for new business spin-offs
Source: Company Presentation from 05/22/24
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