U.K. Opens Bond Market With Cigarettes, Alcohol After Brexit

  • British American Tobacco and Jack Daniel’s maker sell debt
  • Borrowers return on signs post-referendum turmoil is easing

The U.K. has reopened its corporate bond market with cigarettes and alcohol.

British American Tobacco Plc and Jack Daniel’s whiskey maker Brown-Forman Corp. sold sterling bonds on Thursday, ending a month-long shutdown surrounding the nation’s vote to leave the European Union. BAT’s deal comprised 500 million pounds ($663 million) of notes, while Brown-Forman issued 300 million pounds of securities, according to data compiled by Bloomberg.

Borrowers are slowly returning to bond markets as volatility following the Brexit vote shows signs of waning and central bank stimulus sends funding costs tumbling. U.S. beer maker Molson Coors Brewing Co. reopened Europe’s credit markets Wednesday with the first corporate euro bond sale since June 20. 

“Sentiment seems to have changed in the market over the last two days and risk appetite has returned,” said Paola Binns, a portfolio manager at Royal London Asset Management in London, which oversees about 85 billion pounds.

Attractive Bonds

Brown-Forman’s 12-year sterling notes will yield 150 basis points more than U.K. government bonds, the data show. The company also sold 300 million euros of 10-year securities, which priced to yield an 85 basis-point premium over benchmarks. 

“We consider our inaugural step into the European debt capital markets to also be a milestone in our company’s international development,” said Jane Morreau, chief financial officer at Louisville, Kentucky-based Brown-Forman.

BAT’s bonds were sold to yield 130 basis points above gilts. The notes were marketed at a premium that “looks quite attractive given our view on the Brexit impact,” said Mondher Bettaieb-Loriot, head of corporate bonds at Vontobel Asset Management in Zurich, which oversees about 95 billion Swiss francs ($97 billion) of assets. Vontobel was participating in the BAT sale, he said.

A London-based spokesman for BAT confirmed the deal.

Investors can expect periods of volatility that may curtail issuers’ access to markets following the U.K. vote, said Jonathan Brown, co-head of global investment-grade syndicate at Barclays Plc in London, one of the banks that managed the deals.

“Investors are making the assumption that supply could be more limited than they might have expected a few weeks ago, so it’s a good time to go and invest,” said Brown. “They also can’t afford to have cash on deposit at the moment because they get charged money, which reinforces the need to keep looking at the primary market.”

Average yields on the sterling debt of highly rated companies has fallen to 2.97 percent, about 18 basis points from a record low, according to Bank of America Merrill Lynch Index data. The cost to borrow in euros plumbed a new record of 0.9285 percent.

Debt Repayment

Brown-Forman will use proceeds of its sales to repay debt, including some of the borrowings for its purchase of Scotland-based BenRiach Distillery Co., according to a person familiar with the matter who asked not to be identified because they’re not authorized to speak publicly.

The deals are the first substantial corporate sterling debt sales since FCE Bank, the financing arm of Ford, sold 400 million pounds on May 26, according to data compiled by Bloomberg.

German railway Deutsche Bahn AG, sold 750 million euros of July 2031 bonds.

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