BAT Goes Long With 10-Year Bonds as Returns Accelerate: Corporate Finance

British American Tobacco Plc (BATS), the maker of Lucky Strike and Pall Mall cigarettes, raised 600 million euros ($828 million) in its first bond sale since June 2010 by appealing to growing demand for longer-term debt.

The 10-year notes were priced yesterday to yield 123 basis points more than the benchmark swap rate, after initially being offered at a spread of as much as 135 basis points. European company debt due in a decade or longer has returned 6.4 percent this year, compared with 4.1 percent for all maturities, according to Bank of America Merrill Lynch’s EMU Corporates, Non-Financial index data.

Investors said they were drawn to the bonds of the London- based company on evidence that it’s weathering an economic slowdown, with revenue increasing 7 percent in the first nine months of the year. The sale came on the same day that the European Financial Stability Facility delayed its 3 billion-euro offering.

“Food, beverage and tobacco is definitely a defensive sector, and BAT is one of the more defensive names in that area,” said Tugrul Kolad, a money manager in Dublin at Pioneer Investments, which manages more than 97 billion euros of fixed- income assets, including BAT bonds. BAT is “quite cash generative and have been able to raise their prices despite lower volumes,” he said.

Best Performers

Bonds issued by BAT returned 1.7 percent on average last month, the best performance in Bank of America Merrill Lynch’s EMU Consumer Non-Cyclical index of 52 notes sold by companies including BAT, Imperial Tobacco Plc and Procter & Gamble Co. (PG) Debt of non-cyclical companies returned 5.2 percent this year.

Longer-dated European corporate debt is luring buyers with yields of 2.4 percentage points more than one to three-year notes, up from a spread of 1.9 percentage points in May.

“The greatest investor demand is in the 2018-2022 maturity buckets,” Catherine Armstrong, a spokeswoman for BAT in London, said in an e-mailed statement.

While BAT didn’t disclose the use of the proceeds, the cigarette maker said in February that it was planning to buy back 750 million pounds ($1.2 billion) of shares this year, and spent 622 million pounds on repurchases in the first nine months. The stock rose 10 pence to 28.58 pounds in London trading at 12:40 p.m. bringing it to a 16 percent rise for this year.

Premium Yield

The extra yield investors demand to hold the bonds of non- cyclical companies has shrunk 10 basis points since Sept. 30 to 83 more than the benchmark swap rate, Bank of America Merrill Lynch index data show. The spread widened to 98 basis points on Oct. 10, the biggest gap in two years.

The spread on BAT’s new bonds represents a 17 basis-point premium to the gap on the 600 million euros of 4 percent bonds due 2020 that it sold in June 2010. A basis point is 0.01 percentage point. The new notes rose 0.1 cent to 99.3 cents on the euro at 12:38 p.m. in London today, according to Mizuho International Plc prices on Bloomberg.

“There was a premium on the issue, which is important,” said Richard Klijnstra, the head of credit at Kempen Capital Management in Amsterdam whose funds manage 800 million euros of assets. “It’s a good credit in a defensive sector and doesn’t come too often to the market,” said Klijnstra, who bought the bonds.

The cigarette maker’s 7.7 billion pounds ($12.3 billion) of outstanding bonds are rated Baa1 by Moody’s Investors Service and an equivalent BBB+ by Standard & Poor’s and Fitch Ratings. All three firms have had BAT on a “stable” outlook since 2008.

Sales Increase

BAT had net debt of 9.3 billion pounds on June 30, up from 7.9 billion pounds at the end of last year. Net debt is 1.53 times its earnings before interest, taxes, depreciation and amortization, up from 1.35 times at the end of 2010, Bloomberg data show.

The company is weathering the deteriorating economy in Europe, where an index of executive and consumer sentiment in the 17-nation euro region fell to 94.8 from 95 in September, the lowest since December 2009, the European Commission said Oct. 27.

BAT’s revenue increased 7 percent in the first nine months of the year, even as the quantity of cigarettes the company sold fell 0.6 percent to 523 billion from a year earlier, the company said Oct. 26. Sales picked up in emerging markets including Pakistan, Russia and Malaysia, which helped offset declining consumption in the Americas, the cigarette maker said.

The company’s ability to sell bonds on the day the European Financial Stability Facility delayed its 3 billion-euro bond sale shows the appeal of the company’s debt, according to Suki Mann, a credit strategist at Societe Generale SA.

The EFSF, the euro region’s bailout fund, said it postponed its issue of 2021 bonds because of market volatility. Greek Prime Minister George Papandreou roiled markets after requesting a referendum on his country’s rescue package this week.

“The good thing about BAT’s deal is that it’s a good name and a really infrequent borrower and it’s come on the day that the EFSF has pulled its transaction,” said London-based Mann.

To contact the reporter on this story: Hannah Benjamin in London at hbenjamin1@bloomberg.net; Ben Martin in London at bmartin38@bloomberg.net.

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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