Pepsi Sells $2.75 Billion of Debt at Record Low Borrowing Costs

PepsiCo Inc. (PEP), the maker of Gatorade and Lay’s potato chips, got its lowest borrowing costs ever in a $2.75 billion bond sale today, its third offering within a year, as U.S. investment-grade yields plunge to the least on record.

The world’s largest snack-food maker set company records for coupons on three-, 10- and 30-year debt, according to data compiled by Bloomberg. The Purchase, New York-based firm issued $750 million of 0.75 percent notes due in March 2015, $1.25 billion of 2.75 percent securities maturing in March 2022 and $750 million of 4 percent, 30-year bonds, the data show.

PepsiCo has been taking advantage of record-low borrowing costs at the expense of higher leverage as it funds a 4 percent dividend increase and share repurchases of at least $3 billion this year. Chief Executive Officer Indra Nooyi is working to boost U.S. beverage sales and regain market share from No. 1 soft-drink maker Coca-Cola Co. and boost a stock that has declined 4.6 percent this year through yesterday while the Standard & Poor’s 500 Index rallied 9.1 percent.

“We will term out debt, taking advantage of that low interest rate environment,” Chief Financial Officer Hugh Johnston said on an earnings call on Feb 9. “This will increase our leverage, which we are comfortable with because we intend to limit both our number and size of tuck-in acquisitions and to do them only in emerging and developing markets.”

The company may use proceeds from the offering to pay back commercial paper borrowings, according to a regulatory filing today.

Increasing Borrowing

The coupon on the three-year notes is the second-lowest issued this year for that maturity, Bloomberg data show. International Business Machines Corp. sold $1.5 billion of 0.55 percent, three-year debt on Feb. 1.

The three-year debt pays 45 basis points above similar- maturity Treasuries, the 10-year debt offers a spread of 80 basis points and the 30-year bonds yield 95 basis points above Treasuries, Bloomberg data show.

PepsiCo raised $1.25 billion in August, including $750 million of 0.8 percent three-year notes that priced at a 57 basis-point spread and 3 percent, 10-year debt at a spread of 97 basis points, the data show. The company sold $1.75 billion of bonds in May, Bloomberg data show.

PepsiCo’s ratio of debt to earnings before interest, taxes, depreciation and amortization will rise to 2.3 times at the end of 2012 from 2 times at the end of fiscal 2011, CreditSights Inc. analyst Edward Mui said in a Feb. 14 note.

While the company plans to raise borrowing, “it will only increase in line with our growth in cash,” Johnston said in the earnings call. “This cash is largely offshore and is therefore tax inefficient to repatriate. With this, despite a year of earnings decline, we expect to return about $6.3 billion to shareholders this year, up from $5.6 billion in 2011.”

Investment-grade yields fell to 3.42 percent yesterday, the lowest on record in statistics going back to 1986, according to Bank of America Merrill Lynch index data.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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