J&J Sells $1.1 Billion of Debt at Record-Low Rates
J&J Sells $1.1 Billion of Debt
Daniel Acker/Bloomberg
Johnson & Johnson, the maker of products from Tylenol to Listerine joined IBM and McDonald’s Corp. in selling corporate debt in the last month at some of the lowest interest rates on record.
Johnson & Johnson, the maker of products from Tylenol to Listerine joined IBM and McDonald’s Corp. in selling corporate debt in the last month at some of the lowest interest rates on record. Photographer: Daniel Acker/Bloomberg
Johnson & Johnson sold $1.1 billion of bonds at the lowest interest rates on record for 10-year and 30-year securities amid surging investor demand for the highest- rated corporate debt.
The drugmaker, in the first offering by a nonfinancial AAA rated company in 15 months, sold $550 million of 2.95 percent, 10-year notes and the same amount of 4.5 percent, 30-year bonds, according to data compiled by Bloomberg. That’s the lowest coupons for those maturities on record, according to Citigroup Inc. data going back to 1981.
“Even though some faith in the rating agencies has been blown, the triple-A is still sacred,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia.
J&J, the New Brunswick, New Jersey-based maker of products from Tylenol to Listerine, joined International Business Machines Corp. and McDonald’s Corp. in selling corporate debt in the last month at some of the lowest interest rates on record. Corporate borrowing costs have fallen to the lowest levels in more than seven years as Treasury yields plunge amid rising investor concern that the economic recovery is faltering.
The company’s 10-year debt yields 43 basis points more than similar-maturity Treasuries, and the 30-year bonds pay a spread of 68 basis points, Bloomberg data show. A basis point is 0.01 percentage point.
‘Weaker’ Market
“The corporate bond market is weaker than it was earlier in the week,” said David Trahan, head of U.S. investment-grade syndicate at Citigroup in New York. “It’s a testimony to the strength of the J&J credit that they’re actually achieving these credit spreads and hence these coupons in what is otherwise a much softer environment.”
J&J is one of only four nonfinancial U.S. companies with the top credit grade from Standard & Poor’s. S&P also ranks Exxon Mobil Corp., Microsoft Corp., and Automatic Data Processing Inc. as AAA, the same level it assigns to U.S. government debt. Moody’s Investors Service rates J&J an equivalent Aaa.
“There’s still a lot of demand out there for a very high- quality issuer,” Lon Erickson, managing director at Santa Fe, New Mexico-based Thornburg Investment Management, said today in a telephone interview. “It makes a lot of sense for Johnson & Johnson to come get this money.”
Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of America Corp., Deutsche Bank AG and Royal Bank of Scotland Group Plc managed the sale, J&J said in a prospectus filed with the Securities and Exchange Commission. Bill Price, a J&J spokesman, declined to comment beyond the filing.
Lowered Forecast
J&J issued the bonds after lowering its 2010 earnings forecast last month following recalls of over-the-counter medicine that cut into revenue.
The drugmaker is being investigated by the U.S. House Oversight and Government Reform Committee after withdrawing more than 40 types of children’s drugs and recalling 500 lots of pharmaceuticals including Rolaids, Motrin and some forms of Tylenol because of possible contamination from a chemical on packaging materials.
The last debt sale by a nonfinancial company rated AAA by S&P came in May 2009, when Microsoft raised $3.75 billion in its first bond sale, Bloomberg data show.
In J&J’s most recent debt sale, it sold $900 million of 5.15 percent, 10-year notes that paid 103 basis points more than similar-maturity Treasuries and $700 million of 5.85 percent, 30-year bonds at a 113 basis-point spread in June 2008, Bloomberg data show.
Falling Yields
The average investment-grade bond yield has fallen 66 basis points to 3.921 percent since June 11, according to Bank of America Merrill Lynch index data. Yields on investment-grade corporate bonds touched 3.887 yesterday, the lowest since June 13, 2003, when they were 3.848 percent, index data show.
The 10 lowest-yielding U.S. corporate new issues in history were sold in the past 14 months, Deutsche Bank strategists led by Jim Reid in London wrote in an Aug. 4 note.
McDonald’s and Public Service Electric & Gas Co. both sold 10-year, 3.5 percent debt in the past month and Xcel Energy Inc. sold 4.85 percent, 30-year bonds on Aug. 4, the previous record- low coupons for those maturities, according to Citigroup data. The $450 million offering by McDonald’s, the world’s largest restaurant chain, on July 28 was the cheapest debt of that maturity sold in the U.S. in at least 15 years, Bank of America Merrill Lynch data show.
IBM Offering
IBM, the world’s biggest computer-services company, sold 1 percent, three-year notes on Aug. 2 that bear the lowest coupon of the more than 3,400 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt. S&P assigns McDonald’s a grade of A, five steps lower than J&J, and ranks IBM A+, four steps lower.
Thornburg Investment Management wasn’t “too excited” about the offering, Erickson said. He cited a lack of compensation for “outlier” events such as the Gulf of Mexico oil spill that caused London-based BP Plc’s bonds to plunge.
“BP probably could have priced like this last year, two years ago and this year without the oil spill,” he said. Johnson & Johnson is “a very high-quality company, usually runs real smooth, but things come up. Drugs can have a problem, over- the-counter medicines could get tainted, you just never know.”
To contact the reporters on this story: Sapna Maheshwari in New York at smaheshwar11@bloomberg.net; Tim Catts in New York at tcatts1@bloomberg.net.
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